Case Title: DEPT OF REVENUE v SOO LINES INC

Citation: 

Docket Number: 13272

State: montana

Court: Montana Supreme Court

Date: 1977-02-08T00:00:00Z

Document:
No. 13272 IN THE SUPREME COURT OF THE STATE OF MONTANA 1977 THE DEPARTMENT OF REVENUE OF THE STATE OF MONTANA, Plaintiff and Appellant, SO0 LINES, INC., Defendant and Respondent. Appeal from: District Court of the First Judicial District, Honorable Peter G. Meloy, ~istrict Judge Counsel of Record: For Appellant: R. Bruce McGinnis argued, Helena, Montana Robert A. Poore argued, Butte, Montana For Respondent: Hughes, Bennett and Cain, Helena, Montana George T. Bennett argued, Helena, Montana Submitted: January 17, 1977 - Filed: m 8 E n d M r . J u s t i c e Frank I. Haswell delivered t h e Opinion of t h e Court. This appeal from t h e d i s t r i c t c o u r t , Lewis and Clark County, involves t h e v a l i d i t y of t h e Montana Department of Revenue's method of assessment of t a x e s on t h e Montana property of an i n t e r s t a t e r a i l r o a d . The s t a t e t a x appeal board (STAB) and t h e d i s t r i c t c o u r t held t h e method of assessment used by t h e Department of Revenue (DOR) i n v a l i d , and assessed respon- d e n t Soo Lines, Inc. Montana property a t i t s salvage value. W e reverse. Soo Lines i s a Minnesota corporation engaged i n r a i l r o a d operations i n seven mid-western s t a t e s , including Montana. I n Montana, Soo Lines owns and operates a spur l i n e which c o n s i s t s of approximately 60.5 m i l e s of t r a c k , together with supporting equipment and f a c i l i t i e s . This spur l i n e known a s t h e Flaxton Branch, e n t e r s Montana from t h e e a s t and runs w e s t through Sheridan and Daniels Counties. I n l i g h t of t h e intercounty na- t u r e of t h e Soo Lines' Montana operation DOR d i r e c t l y assessed its Montana property. The method of assessment used by DOR i s t h e i s s u e on appeal. The general method of assessment used by DOR t o a s s e s s Soo Lines, a s well a s a l l o t h e r intercounty r a i l r o a d s i n Montana, i s t h e u n i t a r y method. The u n i t a r y method of assessment is de- signed t o c a l c u l a t e t h e value of t h e r a i l r o a d ' s operating property i n Montana on t h e b a s i s of its value a s a p a r t of t h e r a i l r o a d ' s t o t a l i n t e r s t a t e system. DOR d e r i v e s its a u t h o r i t y t o d i r e c t l y assess a l l i n t e r - county r a i l r o a d s from T i t l e 84, Chapter 8 , R.C.M. 1947. Pursuant t o s e c t i o n 84-801, R.C.M. 1947, Soo Lines furnished t o DOR its annual statement of earnings, c o s t s , s t o c k , and debt information. Using t h i s annual statement, DOR assessed t h e r a i l r o a d ' s property by use of t h e u n i t a r y method whereby a three-factor formula of stock and debt, cost of plant, and capitalization of income was employed. Each of these three factors was used to deter- mine a total system value: Indicator of Value Total Railroad System Value Stock and debt $143,232,249 Plant at cost $269,491,266 Capitalized net income $176,383,139 The next step was to formulate a composite of a total system value by "weighting" each of the separate indicators of value by percentages which total 100%. The weighting system is based on the type of industry and general economic conditions. For 1974 the weighted factors were: 30% for stock and debt, 35% for plant, and 35% for capitalized income. By weighting the foregoing indicators at 30%) 35%, and 35% respectively, a total system value of $199,025,716 was obtained. The next step in the assessment procedure involved allo- cation of a proper portion of this system value to Montana. Using the information supplied to DOR by Soo Lines in its annual statement, DOR compared Montana-vs-system gross earnings; Montana- vs-system revenue traffic units; Montana-vs-system car and loco- motive mileages; and Montana-vs-system depreciated investment. Using a straight average of all four indicators, DOR determined that Montana made an economic contribution of .2% (.002) to the total system values. The weighted system value of $199,025,716 was then factored by the respresentative Montana portion of .2% (.002) and an allocation of values to the Montana operating properties of $398,051 was obtained. That figure was equalized at 40% to obtain an assessed value of Soo Lines' Montana operating prop- erties of $159,221. Soo Lines objected to the foregoing assessment on the grounds it w a s u n r e a l i s t i c i n view of t h e f a c t t h a t such a small p o r t i o n of Soo Lines' p r o p e r t y and business a c t i v i t y was l o c a t e d i n Montana. Soo Lines f u r t h e r complained t h e u s e of t h e u n i t a r y method of assessment r e s u l t e d i n Montana t a x i n g t h e r a i l r o a d ' s o u t - o f - s t a t e p r o p e r t i e s . The r a i l r o a d suggested t h e following changes be made i n D O R ' s assessment scheme: (1) Cost of p l a n t as an i n d i c a t o r of v a l u e should be t o t a l l y eliminated and only s t o c k and d e b t and c a p i t a l i z e d i n - come used. ( 2 ) C a p i t a l i z e d income should be averaged over a f i v e year period r a t h e r than t h e two year period c u r r e n t l y used and f u r t h e r t h e income be c a p i t a l i z e d a t 10% r a t h e r than t h e c u r r e n t 8.25%. ( 3 ) Stock and d e b t and c a p i t a l i z e d income should be given equal weight when used a s i n d i c a t o r s of t o t a l system value. ( 4 ) The apportionment r a t i o should be determined on a f i v e year comparison of Montana-vs-system, r a t h e r t h a n t h e cur- r e n t one year comparison. (5) I n t h e u s e of s t o c k and d e b t a s an i n d i c a t o r of v a l u e , t h e s t o c k should be valued on a f i v e year market average r a t h e r than t h e c u r r e n t y e a r ' s v a l u e and nonoperating p r o p e r t y should be s u b t r a c t e d a t its market v a l u e r a t h e r than book value. A hearing before DOR was held a t t h e r a i l r o a d ' s r e q u e s t and re- s u l t e d i n r e f u s a l t o a l t e r t h e assessment. Soo Lines appealed t o t h e s t a t e t a x appeal board (STAB). STAB reversed t h e DOR assessment and remanded t h e case f o r reassessment. STAB found e r r o r i n D O R ' s f a i l u r e t o : (1) deduct from t h e s t o c k and d e b t v a l u e t h e market v a l u e of nonoperating p r o p e r t i e s r a t h e r t h a n t h e book v a l u e , ( 2 ) p r o p e r l y recognize p l a n t obsolescence, and ( 3 ) recognize t h e s p e c i a l c h a r a c t e r i s t i c s of t h e Flaxton Branch, and thereby a l l o c a t e . 2 % (.002) of Soo L i n e s ' system v a l u e t o Montana. The u n i t a r y method of assessment w a s ordered modified t o a t t a i n t h e foreordained r e s u l t of salvage value n o t t o exceed $2,000 per mile. DOR then sought review of t h e STAB decision i n t h e d i s t r i c t c o u r t , and asked t h e c o u r t ' s permission t o introduce a d d i t i o n a l evidence on t h e amount of revenue t h a t o r i g i n a t e d on t h e Flaxton Branch. P r i o r t o t h e d i s t r i c t c o u r t hearing, Soo Lines f i l e d a s e r i e s of admissions of f a c t s which s t a t e d t h e amount of wheat i n t e r m s of weight t h a t had o r i g i n a t e d on t h e Flaxton Branch. The d i s t r i c t c o u r t refused t o allow DOR t o pro- duce t h e a d d i t i o n a l evidence and ordered t h e assessment of Soo Lines' Montana property a t a salvage value of $2,000 per m i l e o r $121,060. DOR appealed t o t h i s Court. The i s s u e on appeal i s a determination of t h e proper method of valuation of Soo Lines' Montana operating p r o p e r t i e s . The use of t h e t h r e e - f a c t o r , u n i t a r y method of assessment of t h e l o c a l property of an i n t e r s t a t e corporation is hardly novel i n t h i s j u r i s d i c t i o n . This method has been approved by t h i s Court repeatedly and a s r e c e n t l y as December 29, 1976. Depart- ment of Revenue v. P a c i f i c Power and Light Co'., Mont . I P.2d , 33 St.Rep. 1277; Western A i r l i n e s , Inc. v. Michunovich, 149 Mont. 347, 350, 351, 428 P.2d 3; Yellowstone Pipe Line Co. v. S t a t e Board of Equalization, 138 Mont. 603, 611, The general purpose of t h e u n i t a r y method of assessment i s c l e a r l y s t a t e d i n Western A i r l i n e s , Inc.: " * * * The ' u n i t a r y ' method r e p r e s e n t s an attempt t o r e a l i z e a f a i r assessment value on property which i s n o t h a b i t u a l l y located i n any given state, b u t which i s used extensively i n i n t e r s t a t e commerce. The underlying philosophy of t h e ' u n i t a r y ' method is t h a t property so used forms a p a r t of an organic system and may be assessed i n t e r m s of t h e economic c o n t r i b u t i o n which each component makes t o t h e e n t i r e system. This approach has been f i r m l y e s t a b l i s h e d i n a s e r i e s of d e c i s i o n s of t h e Supreme Court of t h e United S t a t e s . * * *" The r a i l r o a d urges t h i s Court t o hold t h e salvage value of t h e r a i l s , t i e s , and roadbed i s t h e appropriate measure of t h e value of t h e Flaxton Branch. Soo Lines admits t h e e f f e c t of its request would be t o c r e a t e an exception t o t h e e s t a b l i s h e d s t a t u - t o r y scheme i n regard t o t h e assessment of intercounty r a i l r o a d property. This request is j u s t i f i e d , it claims, by t h e s p e c i a l c h a r a c t e r i s t i c s of t h e Flaxton Branch. This contention i s without m e r i t . There i s no evidence t h e Flaxton Branch i s abandoned o r scheduled t o be abandoned i n t h e near f u t u r e . I n f a c t i n t h e year i n question t h e shipment of 141,707 tons of wheat o r i g i n a t e d on t h e branch l i n e . The Union P a c i f i c R a i l r o a d ' s operation i n Montana i s s i m i l a r t o t h a t of t h e Soo Lines; i t s only Montana property i s a spur l i n e . The u n i t a r y method of assessment i s used t h e r e a s w e l l . It i s c l e a r from Montana law t h a t members of a c l a s s must be given t h e s a m e t a x treatment. P e t e r K i e w i t Sons' Co. v. S t a t e Board of Equali- z a t i o n , 161 Mont. 140, 505 P.2d 102. I f w e were t o value its property a s Soo Lines would have us do, w e would be completely eliminating t h e value of t h e rail- roads' f r a n c h i s e and r o l l i n g stock, i n d i r e c t c o n f l i c t with sec- t i o n 84-802, R.C.M. 1947, which provides i n p e r t i n e n t p a r t : "The s t a t e department of revenue must a s s e s s t h e f r a n c h i s e , roadway, roadbed, rails, and - - r o l l i n g stock of a l l r a i l r o a d s operated i n more than one county." (Emphasis added.) The cases i n t e r p r e t i n g t h e s t a t u t e s dealing with t h e tax- a t i o n of i n t e r s t a t e e n t i t i e s demonstrate t h e reason t h a t t h e u n i t a r y method i s t h e most e q u i t a b l e method of a s s e s s i n g i n t e r - county r a i l r o a d s . This Court s t a t e d i n Western A i r l i n e s , Inc.: "Thus t h e ' u n i t a r y ' method determines not only t h e appropriate share of t h e e n t i r e e n t e r p r i s e which may be taxed by each s t a t e b u t a l s o determines t h e 'enhanced value' a t t r i b u t a b l e t o t h e equipment used by v i r t u e of i t s being a component p a r t of t h e system. The ' u n i t a r y ' method assumes t h a t t h e value of t h e e n t i r e system, as a going concern, i s somewhat greater than the total fair market value of its equipment." A similar statement is found in Yellowstone Pipe Line Co.: " * * * Where property is part of a continuous system which extends through many taxing districts, the proper way to find the true cash value of any part of this property requires that the system as a unit be evaluated. The rationale of this theory is that, where a system is involved, the sum of the value of the parts of the system does not truly represent the total value thereof, and therefore, in order to get a true reflection of the economic value, the system as a whole must be valued as a unit. " In summary, the unitary method of assessment is an equitable means to value the local property of an interstate entity. This method should be applied in the instant case for these reasons: (1) Soo Lines' rolling stock has a taxable value. The kind and quantity present in the state at any given time is not constant and therefore impossible to tax equitably by the method suggested by Soo Lines. (2) The franchise has a taxable value which is not included in salvage value. (3) The value of the Flaxton Branch to the Soo Lines' interstate system is greater than the salvage value of its compon- ents. We have carefully examined other issues assigned for review and find them to be without merit. We order the assessment of the DOR be reinstated with one change. In the computation of the stock and debt indicator of value, the deduction for nonoperating property should be expressed in fair market values rather than book values. This would change the total weighted system value from $199,025,716 as originally calculated to $196,036,976. The .2% (.002) allocated to the Montana segment would then become $392,073.95 and when equalized at 40% would yield an assessed value of $156,830 rather than Judgment is entered accordingly. Justice