Florida East Coast Ry. Co. v. Department of Revenue

• Decision Date: 18 June 1993
• Docket Number: No. 91-3921,91-3921
• Citation: 620 So.2d 1051
• Court: Florida District Court of Appeals
• Parties: 18 Fla. L. Weekly D1458 FLORIDA EAST COAST RAILWAY COMPANY, a Florida corporation, Appellant, v. DEPARTMENT OF REVENUE, State of Florida, Appellee.

Page 1051

620 So.2d 1051

18 Fla. L. Weekly D1458

FLORIDA EAST COAST RAILWAY COMPANY, a Florida corporation, Appellant, v. DEPARTMENT OF REVENUE, State of Florida, Appellee.

No. 91-3921.

District Court of Appeal of Florida,

First District.

June 18, 1993.

Rehearing Denied July 27, 1993.

Fred H. Kent, Jr. of Kent, Hayden, Facciolo & McMorrow, Jacksonville, for appellant.

Robert A. Butterworth, Atty. Gen., Tallahassee; C. A. Daw, Sp. Asst. Atty. Gen., of Chandler, Dillion & Allyn, Chartered, Boise, ID, Lee R. Rohe, Asst. Atty. Gen., Tallahassee, for appellee.

PER CURIAM.

Florida East Coast Railway Company (FEC) appeals a final judgment upholding valuation of its railroad property by the Department of Revenue (DOR) for ad valorem tax purposes for the years 1987 and 1988. The primary issues for our consideration focus upon FEC's contentions: (1) that DOR's unit rule method of railroad assessment results in a "going concern" tax on the railroad which is unauthorized by law; (2) that the trial court imposed an improper burden of proof upon FEC because DOR's valuation failed to consider comparable sales, one of the eight criteria for assessment which must be considered pursuant to section 193.011, Florida Statutes (1987); and (3) that DOR's valuation was invalid because in utilizing the income approach to valuation, DOR failed to use the actual income of FEC, did not use the income of comparable railroads in computing the capitalization rate, and did not appraise FEC's property as of January 1 of the tax years in question. For the reasons that follow, we affirm the judgment of the trial court.

FEC is a Florida corporation which operates a railroad between Jacksonville and Miami, with total trackage in excess of 700 miles. FEC is a Class I railroad (based upon ICC classification) which means that it has gross annual revenues in excess of $93.5 million. The FEC is a wholly-owned subsidiary of Florida East Coast Industries, a publicly-held Florida corporation, which is listed on the New York Stock Exchange. FEC also owns real estate which is not used in connection with its railroad operation, the valuation of which is not at issue in this case.

DOR's valuation of the railroad for the year 1987 resulted in an assessed value of $207,902,000 reduced to a value of $190,902,000 after an administrative conference with DOR. The assessed value was then equalized as required by 49 U.S.C. Sec. 11503, to arrive at a final value of $159,152,490. Similarly, the valuation for 1988 by DOR was $224,373,000, reduced to $181,577,000, and equalized pursuant to 49 U.S.C. Sec. 11503 to $150,964,663.

Being dissatisfied with the 1987 assessment, FEC filed an action in the Circuit Court of Leon County seeking to set aside the 1987 assessment as unlawful, and seeking a determination by the court of the correct assessed value and the tax legally due on its property. A similar action was filed with respect to the 1988 valuation. Jurisdiction of the circuit court was invoked under the provisions of section 194.171, Florida Statutes (1987).

In its complaints, FEC alleged that its property had been assessed far in excess of its just value as determined pursuant to section 193.085, Florida Statutes (1987), the rules and regulations of the Department of Revenue, and the United States Code provisions above mentioned. The complaints also alleged that the assessments were so excessive and unjust as to be both discriminatory and confiscatory. Specifically, FEC alleged that DOR's actions in arriving at the assessments were in violation of sections 193.085, 195.027 and 195.032, Florida Statutes (1987), as well as the regulations of DOR, and Article VII, sections 1 and 4, Constitution of the State of Florida, and Article I, section 8 and the Fourteenth Amendment of the Constitution of the United States, and 49 U.S.C. Sec. 11503, in that FEC was being invidiously discriminated against and denied equal protection under the law. The complaints further alleged that FEC had paid to DOR an amount in taxes equal to the just value of its property for the years in question.

The two cases were consolidated for trial, and the court heard testimony over a period of approximately one week, which included the testimony of expert witnesses for both sides, and voluminous exhibits, including the expert appraisers' written reports, schedules, mathematical calculations, and financial data relied upon by them in In the final judgment, the court determined that FEC had failed to carry its burden of proving, by the greater weight or preponderance of the evidence, that the appraisal of DOR could not be supported by any reasonable hypothesis. Accordingly, FEC failed to overcome the presumption of correctness attaching to DOR's valuations, and the relief sought by FEC was denied.

arriving at their appraisals. Although there were numerous points of dispute concerning DOR's valuation process, the two major points of concern raised by FEC during the progress of the hearing were that in arriving at valuation based upon the income approach, DOR did not capitalize FEC's actual earnings or income, but instead, through various techniques, arrived at the investor expected or "normal" earnings of FEC; and that in its valuation based upon the market approach, DOR failed to consider comparable sales of railroads, but instead based its valuation upon the stock and debt approach to value. FEC also made legal arguments, particularly in its motion for rehearing, objecting to DOR's valuation of the railroad as a "going concern," while purporting to be utilizing the unit rule method of valuation.

I.

"GOING CONCERN" TAX

FEC argues that the unit rule method of assessment used by DOR does not result in the assessment of FEC's property, ¹ but rather, determines the value of the entire railroad as a "going concern," which includes not only the value of FEC's property, but also measures the efficient use of its land and equipment, the management skills of its supervisors, and the quality of service rendered by its employees.

While acknowledging the existence of DOR's duly promulgated rules authorizing a unit rule method of assessment ² FEC nevertheless contends that there is no statutory authority for this method of assessment. Here, FEC argues that while the statute relied upon by DOR as authority for its rules, section 193.085(4), is a valid statute, the statute simply does not authorize a unit rule or "going concern" valuation of railroad property. ³ Alternatively, FEC contends that if DOR's interpretation of section 193.085(4) is accepted as providing legislative authority for a "going concern" tax on railroads, the statute would be in violation of the "single subject" rule of Article III, section 6, Florida We find these and FEC's other arguments addressed to the "going concern" issue without merit. ⁶ First, we think it is appropriate to dispose of FEC's contention that the unit rule method of valuation, even if authorized by Florida law, does not authorize a "going concern" valuation as used by DOR's appraiser, Mr. Ziegler. Examination of the testimony of FEC's appraisal expert, Mr. Moore, reveals that he used the same unit rule method of valuation as did DOR's expert. Mr. Moore was questioned and gave answers on cross-examination as follows:

Constitution, ⁴ and would also be in violation of Article VII, section 4, which requires that tax laws secure a "just valuation" of property for ad valorem taxation. ⁵

Q. First, I would like to ask you a couple of conceptual questions about your appraisal of the Florida East Coast Railroad.

Did you appraise it as a unit under the unit rule in Florida?

A. Yes--the railroad?

Q. Yes.

A. Yes.

Q. And in doing so, did you value all of the real and personal property, all the tangible and intangible property?

A. As far as we know, we took into account all of the factors that the law requires, yes. We valued it, the railway as an operating railroad.

Q. As a going concern?

A. As an operating railroad.

Q. That is not my question. Did you value it as a going concern?

A. We valued it as a going railroad. It was operating as a railroad, and we valued it on the unit value basis.

Q. Did you value specifically its franchise and its location and its competitive position?

A. We took into account, Mr. Daw, all of the factors which, in our opinion, would lead us to a fair value for the railroad. That included all aspects, some of them--most of them tangible, some of them intangible.

Thus, the unit rule method approach, as interpreted and utilized by FEC's expert, was indistinguishable from the approach used by DOR's expert. While the agreement on the use of this method of assessment by both parties' experts does not establish the legality of its use, FEC's argument that DOR's assessment by this method was not in accordance with Florida law is seriously undermined.

We think FEC's position is further undermined by the long history of unit rule assessment of railroads both in Florida and in most of the other states. As stated in Simpson v. Loftin, 160 Fla. 20, 33 So.2d 230, 232 (1948):

The gist of the unit system of taxation as so defined, requires that the value of the railroad system as a whole, be first determined and such value is then apportioned Notwithstanding the approval of the unit rule method as illustrated by the above quotation from Simpson v. Loftin, and other early cases, FEC contends that with the adoption of a new Florida Constitution in 1968, and substantial revision of the taxation statutes, the unit rule method was abandoned. We are unable to agree.

or distributed on the basis outlined to the counties, districts, municipalities, and other governmental units. Its purpose is to treat the physical properties, intangible properties, and capital stock of the railroad as a unit for taxation and to distribute the assessed value thereof to the counties and other units of government in proportion to mileage. Such a system is in general use...