CSX Transp., Inc. v. Forst

• Decision Date: 10 December 1992
• Docket Number: 91-CV-584,Civ. A. No. 91-CV-488,91-CV-650 and 92-CV-722.
• Citation: 808 F. Supp. 517
• Parties: CSX TRANSPORTATION, INC., et al., Plaintiffs v. William H. FORST, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

808 F. Supp. 517

CSX TRANSPORTATION, INC., et al., Plaintiffs v. William H. FORST, et al., Defendants.

Civ. A. Nos. 91-CV-488, 91-CV-584, 91-CV-650 and 92-CV-722.

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

December 10, 1992.

James Linwood Sanderlin, McGuire, Woods, Battle & Boothe, Richmond, VA, James W. McBride, Anne M. Stolee, Laughlin, Halle, McBride, Lunsford & Fletcher, Washington, DC, Courtney George Hyers, CSX Transp., Inc., Jacksonville, FL, and Hugh M. Fain, III, Sanderlin, James Linwood McGuire, Woods, Battle & Boothe, Richmond, VA, for plaintiffs.

James G. Council, John Patrick Griffin, Christopher D. Eib, Office of the Atty. Gen., and Thomas W. McCandlish, Timothy M. Kaine, and Mark B. Rhoads, Mezzullo & McCandlish, Richmond, VA, for defendants.

Steven L. Micas, County Atty. and Steven L. Myers, Asst. County Atty., Chesterfield, VA, for Chesterfield County, Va.

MEMORANDUM

MERHIGE, Senior District Judge.

In the case at bar, plaintiff CSX Corporation, Inc. and its predecessor the Carolina, Clinchfield and Ohio Railway, challenge the tax assessments of their operating railroad property in Virginia for tax years 1988, 1989, 1991 and 1992.¹ Defendant William H. Forst is the Commissioner of the Virginia Department of Taxation, the agency having issued the challenged tax assessments. Because the tax revenue from those assessments is paid to the localities where plaintiffs have property, six local jurisdictions, the Cities of Richmond, Newport News and Alexandria, and the Counties of Henrico, Hanover and Chesterfield, have been allowed to intervene on behalf of defendant.²

Plaintiffs argue that the taxes assessed against them by defendant were excessive and discriminatory in violation of Section 306 of the Federal Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 54 (Feb. 5, 1976), recodified at 49 U.S.C. § 11503 (hereinafter "section 306"). This Court has entered an Order enjoining defendant from collecting funds from plaintiffs in satisfaction of taxes allegedly owed pending disposition of the matter. The matter has been fully briefed and argued and is ripe for disposition. Jurisdiction is based on 28 U.S.C. §§ 1331 and 1337, and on 49 U.S.C. § 11503.

Background

The Constitution of Virginia requires that all real property be assessed at its fair market value for local tax purposes. Va. Constitution, Art. X, § 2 (1992). See also Richmond, F. & P.R. Co. v. Commonwealth, 203 Va. 294, 124 S.E.2d 206 (1962). Under Virginia law the Commissioner of Taxation is empowered to administer the tax laws "with a view to ascertaining the best methods of reaching taxable property and of effecting equitable assessments...." Va.Code § 58.1-202(1) (1991). Moreover, Virginia law directs the department on an annual basis to assess railroad real property "upon the best and most reliable information that can be procured...." Va.Code § 58.1-2655 (1991).

Notwithstanding this manifest grant of discretion to local authorities, the Supreme Court of Virginia has imposed some controls over assessments in light of the fair market value requirement contained in the Constitution. See County Board of Arlington v. Commonwealth, 240 Va. 108, 393 S.E.2d 194 (1990). In County Board, the Supreme Court held unconstitutional the "unit method" of tax assessment, which values railroad systems by capitalizing their net income and then allocates that value among the localities in which the railroad operates. Id.³ On the other hand, the Court has deemed constitutional the taxation method known as "inventory and summation," the method employed by the Commonwealth to reach the assessments challenged here. See Richmond, F. & P.R. Co. v. State Corp. Comm., 230 Va. 260, 336 S.E.2d 896 (1985). Federal law also places certain restrictions on the capacity of localities to tax railroad properties. Section 306 of the Railroad Reform Act is of particular significance and provides in pertinent part as follows:

(b) The following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a State, or authority acting for a State or subdivision of a State may not do any of them:

(1) assess rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the ratio that the assessed value of other commercial and industrial property in the same assessment jurisdiction has to the true market value of the other commercial and industrial property.

* * * * * *

(3) levy or collect an ad valorem property tax on rail transportation property at a tax rate that exceeds the tax rate applicable to commercial and industrial property in the same assessment jurisdiction.

49 U.S.C. § 11503(b) (1992). Section 306 also provides that:

Relief may be granted under this subsection only if the ratio of assessed value to true market value of rail transportation property exceeds by at least 5 percent, the ratio of assessed value to true market value of other commercial and industrial property in the same assessment jurisdiction.

49 U.S.C. § 11503(c) (1992).

The instant case is the latest in an extended series of cases in the courts of the Commonwealth and the United States with regard to the ad valorem tax assessments of railroad property. For the years 1984-1989, defendant assessed taxes on the basis of the unit method of valuation, deemed unconstitutional in County Board. In the wake of the Virginia Supreme Court's County Board decision, the Commonwealth reverted to the "inventory and summation" method of assessing railroad property, a method used by Virginia authorities prior to the adoption of the unit method of taxation in 1984. Under this method, separate values are derived for individual parcels of real property and various categories of individual property. These properties are then summed to obtain the taxable value of the railroad's operating property.

In response, the railroads filed suit in the United States District Court for the Eastern District of Virginia, arguing that valuating railroad property under the inventory and summation method resulted in such property being assessed at a value above market value. The railroads argued that because other property in the Commonwealth was assessed at fair market value, Virginia's taxation scheme discriminated against the railroads in violation of section 306. The district court granted summary judgment in favor of defendants, and the Fourth Circuit affirmed. Chesapeake Western Ry. v. Forst, 938 F.2d 528 (4th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1577, 118 L.Ed.2d 220 (1992).

In Chesapeake, the Court held that section 306 does not provide a party with a basis to challenge the accounting method chosen by a state to assess the true market value of railroad property. According to the Court, "a party may challenge a state's calculations of true market value, under the state's operative valuation methods, to ensure that taxes are not levied discriminatorily." Id. at 530. However, "the job of determining whether a particular valuation method produces a `true' market value involves, at its core, a policy choice." Id. at 531. While acknowledging that section 306 explicitly authorizes examination of state taxation schemes, the Fourth Circuit's holding nonetheless was premised on the general proscription of federal interference in state taxation matters, 28 U.S.C. § 1341, and the lack of facility of the federal courts in undertaking the "difficult, and arguably impossible, task of determining which specific assessment methodology produces true market value of railroad property." Id. at 533.⁴

Discussion

The gravamen of plaintiffs' complaint is that defendant, Commissioner of the Virginia Department of Taxation, levied taxes on plaintiffs' railroad properties at a discriminatory rate in violation of section 306.⁵ Defendant's assessments report the value of six categories of railroad property: (1) roadway and track; (2) operating improvements; (3) telephone, power and water lines; (4) machinery, furniture and other equipment; (5) materials and supplies; and (6) operating land. In this litigation, plaintiffs have challenged only the roadway and track (track structure) and operating land assessments.

The evidence mounted at trial may be fairly summarized as follows. The values defendant reached to assess track structure were achieved pursuant to Va.Code § 58.1 — 2656, which provides that such assessments are to be calculated by arriving at an average value per mile of the railroad's track properties in the Commonwealth of Virginia. Once this average is determined, the assessment is calculated by multiplying the average by the number of miles of track in the Commonwealth. In 1983, the State Corporation Commission (SCC)⁶ calculated track market values and these values were used to calculate the assessments for the tax years at issue here. The 1983 valuations were conducted by A. Lee O'Bryan of the SCC. Mr. O'Bryan attempted to calculate an original cost for the track structure properties by examining past accounts in order to arrive at an estimate of the original cost of assets still in use. He then discounted his track valuations using a multiplier of .80, a depreciation rate previously used by the SCC. See Norfolk & W.R. v. Commonwealth, 211 Va. 692, 695, 179 S.E.2d 623, 627-28 (1971). After calculating the overall value, the SCC assigned certain per mile values to single track, double track, and yard track, and then apportioned the overall value to localities based on the amount of mileage in each jurisdiction, multiplying the local reported value by the local assessment ratio so as to equalize the assessment.

Plaintiffs mounted lengthy testimony at trial intended to cast doubt on the propriety of O'Bryan's "historical cost less depreciation" approach (hereafter referred to as "historic cost") in assessing track structure.⁷ To this end, plaintiffs'...