RICHMOND, FREDERICKSBURG & POT. R. v. DEPT. OF TAX

• Decision Date: 14 June 1984
• Docket Number: Civ. A. No. 83-0752-R.
• Citation: 591 F. Supp. 209
• Court: U.S. District Court — Eastern District of Virginia
• Parties: RICHMOND, FREDERICKSBURG & POTOMAC RAILROAD COMPANY v. DEPARTMENT OF TAXATION.

591 F. Supp. 209

RICHMOND, FREDERICKSBURG & POTOMAC RAILROAD COMPANY v. DEPARTMENT OF TAXATION.

Civ. A. No. 83-0752-R.

United States District Court, E.D. Virginia, Richmond Division.

June 14, 1984.

Douglas Davis, R. Kenneth Wheeler, William L.S. Rowe, Hunton & Williams, Richmond, Va., Urchie B. Ellis, Richmond, Va., for plaintiff.

Gerald L. Baliles, Atty. Gen., Kenneth W. Thorson, Sr. Asst. Atty. Gen., Barbara M. Rose, Asst. Atty. Gen., Richmond, Va., for defendant.

OPINION

WARRINER, District Judge.

Presently before the Court is defendant Department of Taxation, Commonwealth of Virginia's ripe motion for judgment on the pleadings, plaintiff Richmond, Fredericksburg & Potomac Railroad Company's motion for summary judgment, and defendant Department of Taxation's cross-motion for summary judgment. The motions have been thoroughly briefed and oral argument has been heard. The matter is, therefore, ripe for adjudication.

I FACTUAL BACKGROUND

Unless otherwise indicated, the following facts are not in dispute.

Prior to 1979, railroads, unlike other commercial and industrial enterprises, were not subject to the Virginia corporate net income tax, but rather paid a gross transportation receipts franchise tax.¹ On 1 January 1979, railroads became subject to the Virginia corporate net income tax; the gross receipts tax was repealed.

In 1972, Virginia had revised its corporate income tax laws to conform them, in large measure, to the federal income tax laws. This "Conformity Act," Va.Code § 58-151.0111(h) (1974) (repealed as obsolete by 1981 Va.Acts Ch. 402), meant that when the railroads came under the corporate taxation scheme, they were essentially being taxed by the Commonwealth of Virginia as to their income in much the same fashion that they were being taxed, and had been taxed, by the federal government.

Virginia corporate taxable income is based on the corporation's federal taxable income with certain adjustments not at issue. As to the railroads, no subtractions from taxable income on account of gains or losses with respect to property the railroad had acquired prior to 1 January 1979 were permitted.

RF & P filed 1979 and 1980 Virginia income tax returns incorporating the following claims as to non-depreciable property:

On its 1979 and 1980 Virginia income tax returns, RF & P claimed that it should not be taxed on gain realized from sales of non-depreciable property to the extent that the gain was attributable to increases in value prior to 1979, the year in which RF & P first became subject to Virginia income taxation.

Consistent with this position, RF & P deducted from its Virginia taxable income the portion of the gain from sales or exchanges of non-depreciable 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 before 1979.

Complaint at 3.

Likewise, the RF & P in both its 1979 and 1980 tax returns, contrived a formula whereby gain realized on the sale or exchange of depreciable property would receive a deduction:

RF & P took a similar position with respect to gain realized on the sale or exchange of depreciable property. For example, in 1979 and 1980 RF & P received settlements for equipment casualties suffered while being operated on other railroads' lines. For federal tax purposes the casualties were treated as sales or exchanges, with gain being recognized to the extent the settlement amounts exceeded the assets' federal income tax basis. RF & P claimed that the portion of the settlements attributable to depreciation taken prior to 1979 on equipment whose casualties occurred during the current taxable year should be excluded from its Virginia taxable income.

Consistent with this position, RF & P reduced its 1979 and 1980 Virginia taxable income by depreciation claimed on each casualty equipment for federal tax purposes before January 1, 1979, the effective date of Virginia's net income tax on railroads. Stated another way, RF & P treated its equipment as having a Virginia tax basis equal to original cost less depreciation allowable for Virginia income tax purposes after 1978. Gain was reported for Virginia tax purposes only to the extent that a casualty settlement exceeded this Virginia tax basis of the casualty equipment.

Id. at 3-4.

On 21 April and 2 June of 1982 the Department of Taxation issued notices of assessment against the RF & P. These assessments were the result of the Department's refusal to allow the deductions claimed by RF & P on both non-depreciable and depreciable property.

The RF & P applied for relief from these assessments by filing a preliminary amended return for 1979. On 19 November 1982 the railroad timely filed with the Department of Taxation its formal amended Virginia income tax return, claiming a refund of $1,066,475.00.

On its amended return, the RF & P claimed a deduction on depreciable property equal to the amount it had claimed for such depreciable property on its federal tax returns for the tax years prior to 1979. In other words, whereas in its original return, the RF & P claimed item by item deductions for equipment lost through casualty, in its amended return the RF & P claimed all deductions for all depreciable property that it had claimed for federal tax returns prior to 1979.

On 20 September 1983, the Department in a letter denied RF & P's claim in its amended return for the claimed depreciation deduction. Similarly, the Department reiterated its denial of the deductions for both depreciable and nondepreciable property claimed in the original return. Finally, the Department continues to refuse to correct the income tax assessments of April and June of 1982, and refuses the refund claimed by the RF & P.

On 16 December 1983, the RF & P, having exhausted its administrative remedies in the State, and claiming that it had been wrongfully assessed Virginia income taxes by the Department of Taxation, Commonwealth of Virginia, sought in this Court declaratory and injunctive relief against the Department. Specifically, the RF & P claims that the Department of Taxation has violated 49 U.S.C. § 11503(b)(4) by imposing a discriminatory tax upon common rail carriers in Virginia, including the RF & P.

II ISSUES

The issues in this action are clearly drawn. The first is whether 49 U.S.C. § 11503(b)(4) permits this Court to grant relief only for discriminatory property taxes, or for discriminatory income taxes as well.

49 U.S.C. § 11503(b)(1)-(3) meticulously set forth property taxes which a State may not impose upon rail transportation property. 49 U.S.C. § 11503(b)(4) forbids the State to levy "another tax which discriminates against railroads."²

The jurisdictional issue is a two-pronged one raising the additional question of whether the United States District Court has the power to order the kind of relief claimed by RF & P: a refund of income taxes already paid.³

The other issue is whether or not, assuming arguendo, the taxes to be within the intendment of the statute, the tax imposed upon the railroad by the Commonwealth of Virginia actually discriminates against rail-roads in a fashion to violate federal law.

III JURISDICTION

DOES 49 U.S.C. § 11503(b)(4) PROHIBIT DISCRIMINATORY INCOME TAXES, OR IS IT LIMITED TO STATE PROPERTY TAXES OR TAXES ENACTED IN LIEU OF A DISCRIMINATORY PROPERTY TAX PROHIBITED UNDER 49 U.S.C. § 11503(b)(1), (2) or (3)?

The Court is of course aware that a motion to dismiss for lack of subject matter jurisdiction is very different from a motion to dismiss for failure to state a claim upon which relief can be granted. In Associated Dry Goods v. EEOC, 419 F.Supp. 814, 818 (E.D.Va.1976), this Court recognized this distinction. In language that is most apposite to the present case, we stated, "Defendant's assertion that the sections of federal law cited by plaintiff are not applicable to the instant case does not defeat jurisdiction, but rather contests whether the plaintiff has stated a cause of action." Since the claims arise under the laws of the United States, jurisdiction is attained by virtue of 28 U.S.C. § 1331. See for example Burroughs Corporation v. Schlesinger, et al., 403 F.Supp. 633, 636 (E.D.Va.1975).

The question before this Court is whether or not it has the power to grant the relief requested by plaintiff, the answer to which hinges on whether the tax complained of by the railroad is one over which Congress gave the United States District Court jurisdiction. In other words, this Court has the requisite subject matter, i.e., federal question, jurisdiction necessary for it to determine whether or not the tax at issue fits within the statutory scheme of prohibited discriminatory taxes set forth in 49 U.S.C. § 11503.

With that clarification in mind, we proceed to the question of whether or not 49 U.S.C. § 11503(b)(4) forbids a State to levy any tax which discriminates against railway carriers, or whether the subsection simply prohibits the State from enacting a taxation scheme which, although not among the precise property tax devices made unlawful by § 11503(b)(1)-(3), nevertheless, achieves the same interdicted result.

49 U.S.C. § 11503(b) sets forth acts which "unreasonably burden and discriminate against interstate commerce," and flatly forbids a State, its subdivision, the authorities acting for it or its subdivisions, to do any of them.

(1) The State may not assess rail transportation property at a value having a higher ratio to the true market value of such rail transportation property than the ratio borne by the assessed value of other commercial and industrial property in the same assessment jurisdiction to the true market value of such other commercial and industrial property. Stated simply, if the State, for tax purposes, assesses commercial and industrial property at a value twice that of its true market value, it may not at the same time...