Kansas City Southern Ry. Co. v. McNamara

• Decision Date: 27 May 1987
• Docket Number: No. 86-3152,86-3152
• Citation: 817 F.2d 368
• Parties: The KANSAS CITY SOUTHERN RAILWAY CO., et al., Plaintiffs-Appellees Cross- Appellants, v. Shirley McNAMARA, Secretary of the Dept. of Revenue and Taxation, State of Louisiana, Defendant-Appellant Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 368

817 F.2d 368

The KANSAS CITY SOUTHERN RAILWAY CO., et al., Plaintiffs-Appellees Cross- Appellants, v. Shirley McNAMARA, Secretary of the Dept. of Revenue and Taxation, State of Louisiana, Defendant-Appellant

Cross-Appellee.

No. 86-3152.

United States Court of Appeals, Fifth Circuit.

May 27, 1987.

Robert G. Pugh, Shreveport, La., Howard M. Romaine, Dept. of Revenue & Taxation, Legal Section, Robert F. Smith, Baton Rouge, La., for defendant-appellant cross-appellee.

Hilton S. Bell, David M. Culpepper, Andrew Podolnick, F. Frank Fontenot, New Orleans, La., for plaintiff-appellees cross-appellants.

James W. McBride, Washington, D.C., for amicus-assn. of American R.R.

Appeals from the United States District Court for the Middle District of Louisiana.

Before CLARK, Chief Judge, GOLDBERG, and GEE, Circuit Judges.

GEE, Circuit Judge:

The appellees are railroads doing interstate and intrastate business in Louisiana. They sued the state tax collectors, alleging that the Louisiana Tax on Transportation and Communication Utilities ("T & C" tax) discriminates against them in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 ("4-R Act"). The district court ruled in favor of the railroads, but enjoined the collection of the T & C tax only insofar as it exceeded a locally assessed business license tax. We affirm the district court's holding that the T & C tax violates the 4-R Act, but we reverse its ruling that the discriminatory tax can be collected in part.

A. Facts and Prior Proceedings

The railroads sued to enjoin the collection of the Louisiana T & C tax on the ground that it is prohibited by the 4-R Act. The T & C tax is a tax of 2% on the intrastate gross receipts of "public utilities" in Louisiana. La.Rev.Stat.Ann. Sec. 47:1001. ¹ The 4-R Act emerged from a long Congressional debate over improving the plight of the railroad industry. One result of this debate was 49 U.S.C. Sec. 11503(b), which forbids discriminatory taxation of railroads. The statute prohibits states from assessing railroad property at a higher rate than other commercial property, Sec. 11503(b)(1), levying or collecting at such a rate, Sec. 11503(b)(2), levying or collecting ad valorem taxes at a discriminatory rate, Sec. 11503(b)(3), or imposing "another tax that discriminates against rail carriers ...." Sec. 11503(b)(4). ²

In response, the Secretary of the Department of Revenue and Taxation argued that the district court did not have subject matter jurisdiction over the controversy because the railroads' claims did not fall within the 4-R Act's exception to the Tax Injunction Act. On the merits, the Secretary contended that Sec. 11503(b) was meant to apply only to property taxes, and that Sec. 11503(b)(4) should not be interpreted literally to give it unlimited scope; instead, it should be applied only to taxes "in lieu of" property taxes. The Secretary also contended that the tax was not discriminatory when viewed in the context of the entire state taxation scheme.

The district court first held that the 4-R Act applied to taxes other than property or "in-lieu" taxes. Kansas City Southern Railway Co. v. McNamara, 563 F.Supp. 199 (M.D.La.1983). After trial, the district court ruled the tax "discriminatory" within the meaning of Sec. 11503(b)(4) because "The plain intent of the statute is that state taxation upon railroads shall be upon an equal footing with other commercial and industrial taxpayer[s] generally." Kansas City Southern Railway Co. v. McNamara, 624 F.Supp. 395, 399 (M.D.La.1985). The court decided that the T & C tax was a type of business license tax; it noted that "The only other business license tax levied in Louisiana which is comparable to the transportation and communications tax is commonly referred to as the occupation license tax." 624 F.Supp. at 400; see La.Rev.Stat.Ann. Sec. 47:341 et seq. (authorizing local assessment of the occupational license tax). The court pointed out that the burden of the occupational license tax ($7,500 maximum per year per jurisdiction) was far less than the T & C tax. Accordingly, the court held that the T & C tax was discriminatory. The court decided, however, that it would enjoin collection of the T & C tax only to the extent that the amount collected "would exceed the highest amount that would be due under the occupational license tax." 624 F.Supp. at 402. Both sides appeal.

B. Jurisdiction and the Anti-Injunction Act

The 4-R Act includes an exception to the Tax Injunction Act, 28 U.S.C. Sec. 1341. ³ The first question we face is the breadth of the exception. By its terms, the 4-R Act exception to the Tax Injunction Act seems limited to assessment discrimination:

Notwithstanding section 1341 of title 28 and without regard to amount in controversy or citizenship of the parties, a district court of the United States has jurisdiction, concurrent with other jurisdiction of courts of the United States and the States, to prevent a violation of subsection (b) of this section. 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. Sec. 11503(c) (emphasis added).

This subsection is oddly cast. Read literally, it grants a sweeping exception to the Tax Injunction Act for claims under Sec. 11503(b), then immediately takes away jurisdiction on two of four substantive provisions of Sec. 11503(b)--subsection (3) (discriminatory tax rates) and subsection (4) (other discriminations). Our colleagues on the Ninth Circuit have read the language of the jurisdictional section of the statute as a mistake. They think the statute was meant to read: "Relief from discriminatory assessment may be granted under this section only if the ratio of assessed value ..." See Trailer Train Co. v. State Board of Equalization, 697 F.2d 860, 865-66 (9th Cir.) (despite literal language to contrary, statute permits claims in federal court for rate discrimination under Sec. 11503(b)(3); to hold otherwise "leads to ... absurd result[s]"), cert. denied, 464 U.S. 846, 104 S.Ct. 149, 78 L.Ed.2d 139 (1983). The Supreme Court has tacitly affirmed this reading of the statute. The Court recently held that at the behest of the railroads federal courts must determine whether a state tax authority has correctly determined fair market value; the Court did not mention that the relief requested by the railroads does not come within the literal meaning of the exception in Sec. 11503(c). See Burlington Northern Railroad Co. v. Oklahoma Tax Commission, --- U.S. ----, 107 S.Ct. 1855, 95 L.Ed.2d 404 (1987). Other courts reviewing claims under Sec. 11503(b)(4) of non-property-tax discrimination have assumed jurisdiction, overleaping this issue without even addressing it. See, e.g., Alabama Great Southern Railroad v. Eagerton, 663 F.2d 1036 (11th Cir.1981). At oral argument, counsel for the Secretary besought us to follow the literal language of the statute, while all but conceding that such a reading is absurd. Because the result is absurd, we agree with the decisional law that the exception to Sec. 1341 in Sec. 11503(c) does not say exactly what it means. Federal courts have jurisdiction over a case alleging discriminatory taxation in violation of Sec. 11503(b)(3) and (4).

C. The Scope of Sec. 11503(b)(4)

The Secretary argues with great force that Sec. 11503(b) applies to property taxes only, and that Sec. 11503(b)(4) is limited to taxes "in lieu" of property taxes. Cf. Burlington Northern, U.S. at ----, 107 S.Ct. at 1857 (one technique chosen by Congress to rehabilitate the railroad industry "was a prohibition on discriminatory state taxation of railroad property"). She points out that there is virtually no mention of anything but discriminatory property taxes and taxes "in lieu" of property taxes in the legislative history of Sec. 11503(b). ⁴ See generally Richmond, Fredericksburg & Potomac Railroad v. Dept. of Taxation, 591 F.Supp. 209, 215-19 (E.D.Va.1984), rev'd, 762 F.2d 375 (4th Cir.1985). The Secretary also invokes the interpretive canon ejusdem generis ⁵ to bolster her argument that Sec. 11503(b)(4) should not be read to swallow up the preceding subsections.

Every court but two that has considered the scope of Sec. 11503(b)(4) has rejected the Secretary's position. The important exception is a powerful opinion by Judge Warriner in Richmond, Fredericksburg, 591 F.Supp. at 220-21 (Sec. 11503(b)(4) does not reach income taxes). ⁶ For all its logic, however, that decision is now the equivalent of a law review article; it was reversed on precisely this issue by the Court of Appeals. Richmond, Fredericksburg, 762 F.2d at 379. Nevertheless, Judge Warriner's opinion is a cogent argument in the Secretary's favor. The opinion makes a good case from the legislative history that the extremely broad language of Sec. 11503(b)(4) was not intended to swallow the rest of the carefully crafted statute. The Association of American Railroads has filed an amicus brief in this case containing contrary arguments based on extensive research into the legislative history. The presence of this brief is itself a tacit concession by the railroads to the power of Judge Warriner's argument to inspire apprehension, even from the grave.

Within the rococco trappings of "ejusdem generis" and "legislative history," the Secretary's argument and Judge Warriner's opinion pose a simple and compelling rhetorical question:

Why would Congress debate for 15 years about discriminatory property taxes, write various bills that dealt only with property taxes, and then, without discussion and only a few weeks before enactment, tack on to a section entitled "Tax discrimination against rail transportation property " ⁷ a subsection that is unlimited in scope and reduces the rest of the...