County Bd. of Arlington County v. Com. Dept. of Taxation, 891135

• Decision Date: 08 June 1990
• Docket Number: No. 891135,891135
• Citation: 240 Va. 108,393 S.E.2d 194
• Parties: COUNTY BOARD OF ARLINGTON COUNTY, et al. v. COMMONWEALTH of Virginia DEPARTMENT OF TAXATION, et al. Record
• Court: Virginia Supreme Court

Page 194

393 S.E.2d 194

240 Va. 108

COUNTY BOARD OF ARLINGTON COUNTY, et al. v. COMMONWEALTH of Virginia DEPARTMENT OF TAXATION, et al.

Record No. 891135.

Supreme Court of Virginia.

June 8, 1990.

Cynthea L. Perry, Deputy County Atty., Charles G. Flinn, County Atty. (Ashton P. Trice and Bryan T. Camp, Asst. County Attys., Philip G. Sunderland, City Atty., Thomas W. McCandlish, Timothy M. Kaine, Mezzulo & McCandlish, Richmond, on briefs), for appellants.

Barbara M. Rose, Sr. Asst. Atty. Gen. (Mary Sue Terry, Atty. Gen., K. Marshall Cook, Deputy Atty. Gen., James G. Council, Asst. Atty. Gen., on brief), for appellee Com. of Va. Dept. of Taxation.

Everett B. Gibson, Memphis, Tenn. (Charles A. Hartz, Jr., Richmond, Anne M. Stolee, Memphis, Tenn., Francis A. Cherry, Jr., Richmond, Laughlin, Halle, Gibson & McBride, Memphis, Tenn., Randolph, Boyd, Cherry & Vaughan, on brief), Richmond, for appellee Richmond, Fredericksburg and Potomac R. Co.

Present: All the Justices.

WHITING, Justice.

In this appeal, we decide whether the State Tax Commissioner's assessment of railroad real estate based upon an appraisal technique known as the "unit method" is consistent with the provisions of Article X, § 2 of the Constitution of Virginia. As pertinent, that section provides: "[a]ll assessments of real estate and tangible personal property shall be at their fair market value, to be ascertained as prescribed by law." Id.

In general terms, the unit method, as applied in this case, involves an appraisal of all railroad property as a single operating unit or a "going concern." The railroad's weighted average net income over a period of years is capitalized by dividing this average net income by a weighted average cost of debt or equity over the same period of years. Estimated values of the following railroad properties are then deducted from this capitalized value: (1) noncarrier or nonoperating property (property not used in the transportation function); (2) rolling stock; (3) roadbed and track; (4) operating improvements; and (5) various materials and supplies. The remainder is designated as "other apportioned value." This remainder is considered to represent the assessed value of all the railroad's operating real estate and remaining tangible personal property. This value is then divided among the local taxing jurisdictions in proportion to the railroad's main line, side and yard track mileages in each jurisdiction. The local taxing jurisdictions levy their railroad real estate taxes upon these apportioned values.

The Richmond, Fredericksburg and Potomac Railroad Company (RF & P) owns approximately 420 acres of land (Potomac Yard) in Arlington County and the City of Alexandria, most of which are used as a railroad marshalling yard. ¹ Situated in a densely developed area of Arlington and Alexandria, near National Airport, Potomac Yard lies in a corridor bounded by U.S. Route 1 on the west and George Washington Memorial Parkway on the east.

Until 1984, the State Corporation Commission (SCC) was responsible for appraising and then assessing railroad operating real estate pursuant to former Code §§ 58-503.1 and -522. The SCC appraised and assessed each of RF & P's operating real properties in each taxing jurisdiction, and then totaled these results in each jurisdiction. Consequently, there was no apportionment among the taxing jurisdictions. Each taxing jurisdiction levied its tax by applying its tax rates to the SCC's assessed total values for that jurisdiction.

We have reviewed and generally approved SCC tax assessments of Potomac Yard in three previous cases. Railroad Company v. Commonwealth, 203 Va. 294, 124 S.E.2d 206 (1962) (RF & P I ); RF & P v. Corporation Commission, 219 Va. 301, 247 S.E.2d 408 (1978) (RF & P II ); RF & P R.R. Co. v. State Corp. Comm., 230 Va. 260, 336 S.E.2d 896 (1985) (RF & P III ). In 1983, the SCC appraised Potomac Yard at $80,820,700 by a market value review of nearby comparable properties.

Effective in 1984, the General Assembly transferred the railroad assessing function from the SCC to the Department of Taxation, acting through the commissioner. See Code §§ 58.1-2600 and -2655 (specifically transferred by Acts 1983, c. 570). Using the unit method, the commissioner appraised and thereafter assessed essentially the same property ² in 1984 at $6,882,152, in 1985 at $15,599,324, in 1986 at $16,276,146, and in 1987 at $18,320,447. ³

On December 31, 1986, pursuant to the provisions of Code § 58.1-2670, the County Board of Arlington filed an "Application For Correction Of Erroneous Assessment" with respect to the commissioner's 1984 assessment of Arlington's portion of Potomac Yard, naming the Commonwealth of Virginia, the department, and RF & P as defendants. Arlington was later permitted to amend its application in order to challenge the 1985 through 1987 assessments as well. On September 1, 1987, the City of Alexandria filed a similar application, based on the commissioner's assessments of Alexandria's portion of Potomac Yard for 1984 through 1986, and later was allowed to add the assessment for 1987. These cases were later consolidated. On June 14, 1989, after hearing evidence, the trial court denied the applications and sustained the commissioner's assessments. Arlington and Alexandria appeal.

Code § 58.1-202(1) empowers the commissioner to administer the tax laws "with a view to ascertaining the best methods of reaching [taxable property and] effecting equitable assessments." Furthermore, Code § 58.1-2655 directs the department annually to assess railroad real property "upon the best and most reliable information that can be procured." Accordingly, the department argues that the commissioner has the discretion to utilize the unit method as one of several possible appraisal methodologies. ⁴ On the other hand, the localities maintain that there is no constitutional or statutory authority for the use of such a method in appraising RF & P's real estate.

We observed in RF & P I that "[w]hatever the rule may be in other jurisdictions, the plain provision of Section 169 [now Article X, § 2] of the Constitution which requires all real estate to be assessed at its fair market value is the only legal rule which can be used for the assessment of real estate in Virginia." 203 Va. at 299, 124 S.E.2d at 209-10 (citation omitted). Generally, in assessing real estate for local taxation, the commissioner should seek to determine its fair market value by a consideration of its highest and best use in its particular location. See generally RF & P I, RF & P II, RF & P III.

The commissioner testified, however, that his appraisals do not reflect the fair market value of Potomac Yard in its particular location, but do reflect its fair market value as a part of the railroad unit. This, however, is merely the "use value" of Potomac Yard. Use value is defined as

the value a specific property has for a specific use. Use value focuses on the contributory value of the real estate to the enterprise of which it is a part, without regard to its highest and best use or the monetary amount that might be realized upon its sale.

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