Oral argument: November 5, 2007
Appealed from: United States Court of Appeals, Eleventh Circuit (December 19, 2006)
RAILROADS, DISCRIMINATION, RAILROAD REVITALIZATION AND REGULATORY REFORM ACT, VALUATION METHODS, STATE TAXATION
After finding that states consistently overtax railroads when compared with similar commercial and industrial property, Congress passed the Railroad Revitalization and Regulatory Reform Act of 1976 ("the 4-R Act" or "the Act"), 49 U.S.C. § 11501. The 4-R Act permits railroads to challenge a state’s tax assessment as discriminatory in federal court. CSX Transportation, Inc. challenged Georgia’s 2002 tax assessment, claiming it violated the anti-discrimination provision of the Act. The Northern District of Georgia ruled that while the Act permitted CSX Transportation, Inc. to challenge the assessment, it did not permit the railroad to challenge the methods the state used unless it could show that they were irrational or intentionally discriminatory. Agreeing with one other Circuit and affirming the District Court’s decision, the Eleventh Circuit is the fourth Court of Appeals to address the issue. In this case, the U.S. Supreme Court will determine whether a railroad may challenge a state’s methods in assessing its property value under the 4-R Act.
Whether, under the federal statute prohibiting state tax discrimination against railroads, 49 U.S.C. § 11501(b)(1), a federal district court determining the “true market value” of railroad property must accept the valuation method chosen by the State.
Whether 49 U.S.C. § 11501(b)(1), the federal statute that prohibits states from overtaxing railroads as compared with other commercial and industrial property within the same assessment jurisdiction, permits a railroad to challenge the method by which a states assesses the market value of its rail property, when that method is not irrational or intentionally discriminatory.
The following facts are generally derived from the Circuit Court decision in this case. CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281 (11th Cir. 2006).
In the case at hand, the U.S. Supreme Court will determine whether the Railroad Revitalization and Regulatory Reform Act of 1976 ("the 4-R Act" or "the Act"), 49 U.S.C. § 11501, permits a railroad to challenge the methods by which a state determines the market value of rail property for tax purposes. See id. The 4-R Act provides an exception to the general rule of the Tax Injunction Act, 28 U.S.C. § 1341, which bars federal courts from interfering with matters of state taxation. 49 U.S.C. § 11501(c). In deference to the states, the Act requires that the ratio of assessed value to true market value exceed a five percent variance from the ratio for other commercial property before a federal court may provide relief. 49 U.S. C. § 11501(b)(1).
The State of Georgia ("the State") taxes railroads as public utilities, a category which also includes investor-owned electric utilities, investor-owned telephone companies, pipeline companies, and gas distribution companies. CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281, 1283 (11th Cir. 2006). The State assesses the property value of all taxable property owned by a public utility. Id. The State then uses the assessments to determine the amount of tax the public utility must pay the State. Id.
In 2002, CSX Transportation, Inc. ("CSXT") transported commercial freight by railroad throughout Georgia. Id. Gregg Dickerson, an employee of the State Revenue Department, prepared CSXT's valuation assessment for that year. Id. at 1284. Dickerson had prepared assessments for the State for ten years before he left to work in the tax department at Norfolk Southern Railroad in 1993. Id.In 2001, Dickerson returned to the Department to serve as the program manager of its Public Utilities section. Id.
Upon returning to work for the State, Dickerson changed one aspect of the State's valuation procedure. Brief for Respondents at 4. Instead of relying on the income figures listed in the railroads' regulatory filings as it had in the past, the State began to rely on the income figures the railroads provided to their shareholders. Id. The difference in these values that the railroads relied on was striking: in 2001 CSXT reported to its shareholders that its operating income was $743 million but also reported to the State's Surface Transportation Board that its operating income was only $458 million for the same period. Id. At trial, CSXT officials acknowledged that the figures it provided to the shareholders better reflected the railroad's financial performance than the figures it provided in its regulatory filings. Id.
In 2002 the State used three different valuation methods and assessed the true market value of CSXT's railroad properties at $8.2 billion. CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281, 1284 (11th Cir. 2006). CSXT filed a complaint against the State under the 4-R Act challenging the appraisal. Id. at 1285.At trial, the judge refused to consider an alternative appraisal offered by CSXT which valued its rail property at $6.2 billion. See CSX Transp. v. State Bd. of Equalization, 448 F.Supp.2d 1330, 1348 (N.D.Ga. 2005). The judge ignored the railroad's assessment because CSXT used a valuation method different than that used by the State. Id. The judge determined that, absent a clear statement to the contrary, the 4-R Act did not permit railroads to challenge the methods chosen by the State. See id. On appeal, the Eleventh Circuit affirmed the judgment of the district court on the same grounds. See CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281, 1287 (11th Cir. 2006).
The question certified by the U.S. Supreme Court in this case appears limited in scope. The case implicates a statute which only applies to the railroad industry, and even then, applies only to certain tax assessments of rail property. As narrow as the issue appears on its face, however, the Court’s decision in this case may resonate more broadly. The Court also will address issues of federalism and the principles of statutory interpretation. It will consider the balance of power between the state and federal governments and will determine how the statute impacts that balance. In interpreting the statute, it will analyze the statute’s plain language as well as Congress’ intent in drafting the law. The decision may provide a template for federal courts to follow when addressing future questions offederalism and statutory interpretation.
The states hold a fundamental power to raise revenue through taxation. National Private Truck Council, Inc. v. Oklahoma Tax Commission, 515 U.S. 582, 586 (1995). This power is central to the states’ ability to govern and to provide services. See Brief for Multistate Tax Comm’n as Amicus Curiae at 7-8. Accordingly, the manner in which states raise revenue through taxation falls largely within their discretion. Id. In recognition of this principle, the Tax Injunction Act 28 U.S.C. § 1341, bars federal courts from interfering in state tax disputes so long as state courts provide adequate and efficient remedies. See Brief for Respondent at 12. Nonetheless, Congress may create exceptions to the Tax Injunction Act, 28 U.S.C. § 1341. Id. The statute at issue in this case represents one such exception. Id.
In 1976, Congress passed the Railroad Revitalization and Reform Act (“the 4-R Act” or “the Act”), 49 U.S.C. § 11501. The Act created a federal cause of action for railroads in the event of discriminatory tax assessments by the states. Brief for Petitioner at 4-5. Congress passed the statute after 15 years of studying the railroad industry, including eight major railroad bankruptcies, which it determined were caused in large part by state over-taxation. Id. at 3-5. To prevent the statute from being an unconstitutional intrusion into state powers, the 4-R Act only applies to state activities that “unreasonably burden and discriminate against interstate commerce.” 49 U.S.C. § 11501(b). The Act prohibits a state from assessing the value of rail property at a higher rate than it assesses other commercial and industrial property in the same area. Id. at 11501(b)(1). Any discrepancies are measured by taking the ratio of the railroad’s assessed value to its true market value and comparing it with the same ratio for other commercial and industrial property. Id. A federal court only may grant relief to a complaining railroad company when the railroad’s ratio exceeds the ratio for other commercial and industrial property in the area by at least five percent. Id. at 11501(c).
In 2002, Georgia (“the State”) assessed the value of CSX Transportation’s (“CSXT”) property within the state at $8.2 billion, which represented a 47% increase from its assessed value in 2001. Brief for Petitioner at 15. The drastic increase occurred primarily because the State began to use income figures from the railroad’s annual shareholder report, rather than income figures that the railroad reported in its regulatory filings. Brief for Respondents at 4. Such figures differed dramatically in the past. Id. at 4, n.3. In 2001, CSXT’s annual shareholder report listed an operating income of $743 million. Id. For the same year, CSXT reported to the Surface Transportation Board an operating income of only $458 million. Id. Moreover, railroad officials acknowledged at trial that the information reported to the shareholders better reflected CSXT’s value. Id.
In the District Court for the Northern District of Georgia, CSXT argued that the State’s market value assessment was incorrect, and presented its own expert who assessed the railroad’s value at $6.2 billion. CSX Transp., 472 F.3d at 1286. The District Court held that unless CSXT could show that the State’s methods were irrational or intentionally discriminatory, the 4-R Act did not allow it to consider the appraisal because it resulted from different methods than those used by the State. Id. The Eleventh Circuit Court of Appeals affirmed the lower court’s holding. Id. at 1290. It reasoned that the principles of federalism, which proscribe federal interference in matters of state governance, require courts to construe the statute narrowly and to limit its reach to its explicit terms. Id. at 1288-89.
The State supports the Eleventh Circuit’s holding and contends that federal courts only have authority explicitly provided to them in the statute. Brief for Respondents at 12. The State argues that since the statute does not explicitly state that federal courts may review a state’s valuation methods, the Court should not grant federal courts this power. Id. at 14-16.
Conversely, CSXT challenges the Eleventh Circuit’s interpretation of the phrase “true market value” as used in the statute. Brief for Petitioner at 24. The Eleventh Circuit interpreted the phrase “true market value” to mean the state’s assessment of the rail property’s market value. Id. Instead, CSXT defines the phrase “true market value” to mean the real value the rail property holds in the market place. Id. Hence, CSXT contends the statute explicitly requires federal courts to make independent determinations of the railroad’s property value. Id. Accordingly, a railroad must be prepared to present evidence of its own valuation of the rail property in order to allow the district court to make this independent assessment. Id. Indeed, CSXT asserts that a contrary interpretation conflicts with Congress’ intent in passing the statute. Id.
Both CSXT and the State forecast dire consequences in the event that their opponent prevails. CSXT claims that if the Court restricts federal district courts to only review the State’s application of its valuation methods, the decision will undermine the basic purpose of the 4-R Act. Brief for Petitioner at 19. According to CSXT, if the State prevails, Georgia and other states could continue to overtax railroads by using technically reasonable but inaccurate valuation methods in order to inflate rail property values. Id. Conversely, the State predicts that a win for CSXT would lead to greater federal interference in matters of state policy as well as an increased burden on the federal district courts. Brief for Respondents at 17, 32. Should CSXT prevail, the State warns that railroads continually would be able to challenge a state’s valuation methods by claiming their own assessment to be more accurate than the state’s. See id. at 38-39.
Roughly 50 years ago, Congress investigated the railroad industry’s financial health. Brief for Respondents at 3. Subsequently, Congress determined that states routinely overtaxed railroads, which caused railroad companies to pay approximately 40 percent more in taxes than the owners of comparable industrial and commercial properties. Id. Responding to its own findings, Congress passed the Railroad Revitalization and Reform Act of 1976 (“the 4-R Act” or “the Act”), 49 U.S.C. § 11501. Id. at 4.
The 4-R Act grants jurisdiction to federal courts over any action in which a railroad alleges a state discriminated against it by taxing it at a rate greater than other similar property. 49 U.S.C. § 11501(c). The 4-R Act is an exception to the Tax Injunction Act, 28 U.S.C. § 1341, a statute that prohibits federal courts from interfering in matters of state taxation if an adequate remedy exists in state court. Brief for Multistate Tax Commission as Amicus Curiae at 4. The Tax Injunction Act codified the long-seated principle of federalism, which restricts federal interference in matters of state sovereignty. Brief for Respondents at 10.
The U.S. Supreme Court previously addressed the 4-R Act in Burlington Northern Railroad v. Oklahoma Tax Commission.481 U.S. 454 (1987). There, the Court held that a federal district court could review a railroad’s claim that a state discriminated against it by overvaluing the railroad’s assets. Brief for the United States as Amicus Curiae at 5. Central to this holding, the Court determined that a federal district court need not accept the state’s valuation of the assets. Id. The Court also held that a railroad need not prove intentional discrimination in order to initiate a challenge. Id. The Court considered whether a railroad may challenge a state’s application of its valuation methods and explicitly avoided addressing the issue of whether a railroad may challenge the valuation method, itself. Burlington Northern Railroad v. Oklahoma Tax Commission, 481 U.S. 454, 463 n.5 (1987). Following Burlington, the circuit courts split on the issue. CSX Transp., 472 F.3d 1281.
The case at hand centers on the issue of whether allowing federal courts to consider different assessment methods from those used by a state violates the core principles of federalism. Brief for Multistate Tax Commission at 3. A state’s power to tax is one of its most fundamental powers and the federalist structure of the United States functions under a strong presumption that the federal government should not interfere in questions of state tax administration. Brief for Respondents at 10. Similarly, federal courts must refrain from expanding any statute that impacts state taxation beyond its “evident scope.” See Dep’t. of Revenue of Or. v. ACF Indus., Inc., 510 U.S. 332 at 345 (1994). Accordingly, the “clear statement rule” requires that if “Congress intends to alter the usual constitutional balance between the States and the Federal Government, it must make its intention to do so unmistakably clear in the language of the statute.” See Gregory v. Ashcroft, 501 U.S. 452, 460-61 (1991). Therefore, courts must interpret a statute in accordance with its clear meaning and the intent of the legislature. Brief for Petitioner at 35.
The parties dispute whether the plain language of the 4-R act permits federal courts to consider alternative valuation assessments. Brief for Petitioner at 24-26; Brief for Respondents at 18-19. The statute provides:
(b) …a State…may not…(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…
(c) …a district court of the United States has jurisdiction … to prevent a violation of subsection (b) of this section.
The statute requires federal district courts to determine a railroad’s true market value. Id. CSX Transportation, Inc. (“CSXT”) asserts that the provision is unambiguous and clear in its meaning, because preclusion of other assessment methods will stop courts from fulfilling their duty. Brief for Petitioner at 23, 41. In contrast, the State of Georgia (“the State”) points to the statute’s failure to mention whether a railroad can challenge a state’s valuation methods. Brief for Respondents at 15. The State declares that under the clear statement rule, this absence means that the statute does not permit federal courts to review evidence of alternative assessment methods. Id. Further, the State argues federal courts satisfy their duty under the Act simply by reviewing the application of a state’s chosen assessment methods. Id. at 18. In fact, the District Court for the Northern District of Georgia valued CSXT’s true market value at $7.7 billion, a figure presented by neither party and based on evidence that only involved the State’s chosen methods. CSX Transportation, Inc. v. State Bd. of Equalization, 448 F.Supp.2d 1330, 1350 (N.D.Ga. 2005).
The Eleventh Circuit found that the anti-discrimination provision did not “clearly state” that Congress intended federal courts to review a state’s chosen assessment methods and entered judgment in favor of the State. CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281, 1287 (11th Cir. 2006). In response, CSXT asserts that the “clear statement rule” applies only when a court may interpret a statute in more than one way because its meaning is ambiguous. Brief for Petitioner at 41. Here, according to CSXT, the statute unambiguously charges a district court to determine a railroad’s true market value; hence, the “clear statement rule” does not apply. Id. CSXT also points out that Congress expressly passed the 4-R Act to grant federal courts jurisdiction to review state taxation of railroads. Id. Accordingly, CSXT argues, the entire Act clearly stated its purpose to alter the constitutional balance between the federal and state governments, satisfying the “clear statement” requirement. Id. at 42.
In contrast, the State urges the Court to protect a state’s choice in assessment methods. Brief for Respondents at 17-18. Agreeing with CSXT, the State acknowledges that the statute requires federal district courts to evaluate the railroad’s true market value to fulfill its duty. Id. at 17. However, the state disputes CSXT’s contention that the statute requires federal courts to review assessment methods other than those chosen by the state. Id. Instead, the State argues that a state’s choice in assessment methods reflects a policy choice that federal courts must respect. Id. The State points out that a state’s choice may depend upon its particular economic resources and time constraints and a federal court should not second-guess its decision. Id. For example, the State suggests that a state may choose a method because it has collected relevant data in prior years, or it may avoid that method because it has access to other types of reliable information. Id. The State also asserts that a contrary position would wreak havoc on the federal judicial system, permitting “a battle of expert witnesses over whether a railroad has a method that is ‘better’ than the state’s.” Brief for Respondents at 18, 32.
This case requires the U.S. Supreme Court to clarify whether the 4-R Act permits railroads to challenge the methods by which a state assesses the market value of the rail property. The decision may illustrate how the Court approaches statutory interpretation and involves the sensitive issue of federalism and state sovereignty. A ruling for Georgia may limit future interpretation of similar statutes to the literal language of the law. In contrast, a ruling for CSXT may emphasize the importance of congressional intent in similar cases. Ironically, even if CSXT succeeds in the Supreme Court, it remains unclear whether it will ultimately prevail against Georgia. In that situation, the Court would likely remand the case so that the district court can determine the “true market value” of the railroad in light of CSXT’s assessment. CSX Transportation v. State Bd. of Equalization, 472 F.3d 1281, 1286 (11th Cir. 2006).
Edited by: Tim Birnbaum
- Amicus Brief of the Tax Foundation
- Amicus Brief of the United States
- U.S. Code: Tax Discrimination Against Rail Transportation Property