Richmond, Fredericksburg & Potomac R. Co. v. Department of Taxation, Com. of Va.

• Decision Date: 22 May 1985
• Docket Number: No. 84-1774,84-1774
• Citation: 762 F.2d 375
• Parties: RICHMOND, FREDERICKSBURG & POTOMAC RAILROAD COMPANY, Appellant, v. DEPARTMENT OF TAXATION, COMMONWEALTH OF VIRGINIA, Appellee. Association of American Railroads, Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 375

762 F.2d 375

RICHMOND, FREDERICKSBURG & POTOMAC RAILROAD COMPANY, Appellant, v. DEPARTMENT OF TAXATION, COMMONWEALTH OF VIRGINIA, Appellee Association of American Railroads, Amicus Curiae.

No. 84-1774.

United States Court of Appeals Fourth Circuit.

Argued Feb. 4, 1985.

Decided May 22, 1985.

William L.S. Rowe, Richmond, Va. (Douglas W. Davis, Thomas McN. Millhiser, Hunton & Williams, Urchie B. Ellis Vice President-Law, Richmond, Va., on brief), for appellant.

Barbara M. Rose, Asst. Atty. Gen., Richmond, Va. (Gerald L. Baliles, Atty. Gen. of Va., Kenneth W. Thorson, Sr. Asst. Atty. Gen., Richmond, Va., on brief), for appellee.

(James W. McBride, Gregory G. Fletcher, Marion F. White, Laughlin, Halle, Clark, Gibson & McBride, Memphis, Tenn., on brief), for amicus curiae.

Before SPROUSE and CHAPMAN, Circuit Judges and KISER, United States District Judge for the Western District of Virginia, sitting by designation.

CHAPMAN, Circuit Judge:

Plaintiff Richmond, Fredericksburg & Potomac Railroad Company (RF & P) brought this action against defendant Department of Taxation, Commonwealth of Virginia (the Department), alleging that its application of the Virginia corporate net income tax discriminates against railroads in violation of Sec. 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 54 (1976), recodified at 49 U.S.C. Sec. 11503 (1982) (the 4-R Act). The district court granted judgment on the pleadings and summary judgment in favor of the Department and RF & P appealed. The district court held that Sec. 306(1)(d) of the 4-R Act does not apply to allegedly discriminatory state net income taxes, the Virginia net income tax, as applied, does not discriminate against railroads, and Sec. 306(2) does not authorize retroactive refund relief. Richmond, Fredericksburg & Potomac R.R. v. Department of Taxation, 591 F.Supp. 209 (E.D.Va.1984). We hold that Sec. 306(1)(d) does apply to discriminatory state net income taxes but that the Virginia net income tax, as applied, does not discriminate against railroads. ¹ Accordingly, we reverse in part and affirm in part.

I

A. Background ²

Virginia imposes a corporate net income tax on railroads and other commercial and industrial corporations. Va.Code Secs. 58-151.032, 58-151.032:1, and 58-151.032:2 (1974 & 1983). The Virginia taxable income for a tax year is based on the corporation's federal taxable income for the tax year subject to certain adjustments set forth in the Virginia Code.

From January 1, 1903, to December 31, 1978, RF & P and other railroads in Virginia were subject to a franchise tax measured by gross transportation receipts. Va.Code Sec. 58-519 (1974). RF & P and other railroads were not subject to the Virginia net income tax and their income from sources other than transportation receipts was not taxed. Thus, the gain railroads realized from the sale or exchange of both depreciable and nondepreciable assets was not taxed and, unlike other commercial and industrial taxpayers, railroads were permitted no deductions for losses, expenses or depreciation.

During this time other industrial and commercial taxpayers in Virginia were subject to a net income tax. Under the Virginia net income tax as enacted for taxable years prior to 1972, gains or losses from the sale or exchange of property were taken into account in determining the net income subject to tax. A reasonable allowance (depreciation) was allowed for exhaustion, wear and tear of property used in a trade or business or property held for the production of income. See Va.Code Sec. 58-81(i) (1959) (repealed by 1971 Va.Acts, Ex.Sess., ch. 171). For Virginia income tax purposes, a corporate taxpayer had the option of calculating depreciation on a straight-line method or the method by which it calculated depreciation for federal income tax purposes. The additional twenty percent first-year bonus depreciation under federal law was not allowed for Virginia tax purposes. See I.R.C. Sec. 179 (1982). Thus, the depreciation deduction on depreciable assets for Virginia income tax purposes could have been smaller than the corresponding federal deduction. As a result, a corporation would have had slightly higher Virginia taxable income but an asset would have a slightly higher Virginia adjusted basis. Accordingly, when an asset was sold a corporation's Virginia taxable income would be slightly lower than its federal taxable income because of the higher Virginia basis, assuming a gain.

In 1971 Virginia amended its income tax laws to conform to federal law effective for taxable years beginning in 1972. 1971 Va.Acts, Ex.Sess., ch. 171 (the Conformity Act). "Federal taxable income" for corporations became the starting point for determining "Virginia taxable income." This conformity tax structure also contained certain transitional modifications. One of those transitional modifications, Sec. 58-151.0111(h) (repealed as obsolete by 1981 Va.Acts, ch. 402), allowed taxpayers to reduce their 1971 Virginia taxable income by:

[T]hat amount, if any, by which the adjusted basis of depreciable property determined for Virginia income tax purposes ... exceeds the adjusted basis for the same property for federal income tax purposes determined at the close of the same period.

This "Extra Depreciation Deduction" permitted such a large deduction that in 1974 the Virginia General Assembly amended Sec. 58-151.0111(h) to allow a three-year carry-over of any unused portion.

The Extra Depreciation Deduction was designed to bring the Virginia "adjusted basis" of a taxpayer's depreciable property "determined for Virginia income tax purposes" into line with the adjusted basis of those assets for federal tax purposes. Differences in the two bases existed, for example, because taxpayers could have used the straight-line method of calculating depreciation for Virginia income tax purposes while using an accelerated calculation for federal tax purposes.

In 1978 railroads in Virginia were made subject to the Virginia net income tax and relieved of the franchise tax on gross transportation receipts for taxable years beginning in 1979. 1978 Va.Acts, ch. 784. Accordingly, "federal taxable income" became the starting point for determining "Virginia taxable income" for RF & P and the other railroads. Although Railroads also became subject to certain transitional modifications similar to those enacted in 1972 under the Conformity Act, these transitional modifications did not include an adjustment to the basis of depreciable assets similar to the Extra Depreciation Deduction. Compare Va.Code Sec. 58-151.0111(h) (1974) with Sec. 58-151.03:2 (1983).

B. The 4-R Act

In 1976 Congress passed the Railroad Revitalization and Regulatory Reform Act effective February 5, 1979. Pub.L. No. 94-210, 90 Stat. 54 (1976). In 1978 Sec. 306 of the 4-R Act was recodified as part of the Revised Interstate Commerce Act, 49 U.S.C. Sec. 11503 (1982). See Pub.L. No. 95-473, 92 Stat. 1466 (1978). Although the recodification was not intended to effect any substantive change in the meaning of the 4-R Act, the language of the recodification differs significantly from the language of Sec. 306. This court has held previously that the language of Sec. 306 must be used for purposes of statutory analysis. Clinchfield R.R. v. Lynch, 700 F.2d 126, 128-29 n. 1 (4th Cir.1983).

Section 306 of the 4-R Act expressly declares that discriminatory state taxation of railroads constitutes an unreasonable and unjust discrimination against, and an undue burden upon, interstate commerce. Section 306(1) forbids a state, subdivision of a state, or any authority acting for a state or subdivision from:

(a) The assessment (but only to the extent of any portion based on excessive values as hereinafter described), for purposes of a property tax levied by any taxing district, of transportation property at a value which bears a higher ratio to the true market value of such transportation property than the ratio which the assessed value of all other commercial and industrial property in the same assessment jurisdiction bears to the true market value of all such other commercial and industrial property.

(b) The levy or collection of any tax on an assessment which is unlawful under subdivision (a).

(c) The levy or collection of any ad valorem property tax on transportation property at a tax rate higher than the tax rate generally applicable to commercial and industrial property in the same assessment jurisdiction.

(d) The imposition of any other tax which results in discriminatory treatment of a common carrier by railroad subject to this part.

Pub.L. No. 94-210, 90 Stat. 54 (1976) (emphasis added).

C. RF & P's Tax Returns

On its 1979 and 1980 Virginia income tax returns, RF & P claimed that it should not be taxed on gain realized on sales of nondepreciable property in 1979 and 1980 to the extent that the gain was attributable to increases in the value of that property prior to 1979 when it became subject to the net income tax. Therefore, RF & P deducted from its Virginia taxable income that portion of the gain from the sale or exchanges of nondepreciable property determined by multiplying the total gain by a fraction, the denominator of which was the total holding period of the property by RF & P and the numerator of which was the holding period of the property prior to 1979.

RF & P also claimed on its 1979 and 1980 Virginia income tax returns that it should not be taxed on gain realized from the sale of depreciable property to the extent that the gain was attributable to federal tax depreciation allowed or allowable prior to 1979. None of this depreciation had been allowed or allowable to RF & P as a deduction for Virginia tax purposes. Thus, RF & P deducted from its Virginia taxable income federal tax depreciation allowed or allowable prior to 1979 on depreciable property that it sold or exchanged in 1979 or 1980.

The Department...