Opinion ID: 1234684
Heading Depth: 1
Heading Rank: 3

Heading: application of the statute to this case

Text: This case turns on whether the Cottonbelt railroad operations are Southern Pacific's property, as that term is defined in ORS 308.510(1) and used in the rest of the statutory scheme. By thus focusing the issue, we must exclude as irrelevant many of the criteria considered by the Tax Court. Composition of the unit for purposes of income and franchise taxation has at best limited significance in this property tax case. Even as to property assessment, the decision of another state to assess the two lines as a unit or separately can be authority in this court only to the extent that the other state's test for composition of the unit is the same as Oregon's. Since a combined unit might result in a flow of tax revenues away from states where Cottonbelt operates, taxing authorities in those states have no incentive to assess the combined unit even if their property tax laws might permit them to do so. Of the five states other than Oregon where only Southern Pacific operates, California assesses the lines as a unit while the others do not. Since of all the states in which Southern Pacific operates, Oregon's position as a western terminal is closest to California's, this might seem to be some precedent for assessing the combined unit. However, neither the record nor the briefs reveal the reasons or legal basis for any other state's decision. [15] Thus the assessment decisions of other states do not help us interpret our own statute. Separate accounting, separate regulatory reporting, and separate incorporation do not reveal the property relation between two companies, because a company that is controlled by another might maintain its own independent books, reports, and corporate form. These reports are material but not conclusive evidence of valuation. ORS 308.545. Although the report of the Interstate Commerce Commission shall indicate the value of the property of each common carrier as a whole and separately identify the value of its property in each State    in which the property is located, 49 U.S.C. § 10781(b) (1980 Supp.), regulatory reporting has purposes not relevant to characterizing property for this scheme of ad valorem taxation. See, United States v. Los Angeles & Salt Lake Railroad Co., 273 U.S. 299, 310, 47 S.Ct. 413, 414, 71 L.Ed. 651 (1927); Portland Gen. Elec. Co. v. Dept. of Rev., 7 OTR 33, 40 (1977). The statute is clear that the form of property use is immaterial. While the separate accounting and reporting makes combined valuation more difficult, convenience of assessment is not the test of what falls in the entire property, ORS 308.555. An integrated enterprise can market separate financial obligations of its components, as Southern Pacific itself does for its equipment. For the same reason, separation of marketing, purchase and repair, operations, and labor show nothing about the property relation between two companies, since these separations could be drawn by delineating two divisions of a single company. Nor is economic or geographic remoteness the test for the scope of the unit. If two lines are only remotely connected, then there may be little going-concern value to capture, but that will be reflected by a suitable valuation methodology. The Tax Court said that the Oregon operation must be so closely related to that of the out-of-state operations that it would be directly affected by, say, an out-of-state casualty. But proximity is not the test for the boundaries of the unit. The properties of Southern Pacific in Texas and Louisiana are as remote as the Cottonbelt properties there, but no one contests that all Southern Pacific's properties, however distant, are equally part of the unit. The physical connection of these two lines is irrelevant, since two railroads could compose a single unit though separated by a gap. On the other hand, because the relevant test is the company's property, the Department's suggested test of operational integration is too broad as an interpretation of this statute. [16] Operational integration is a matter of degree, while the statute requires an all-or-nothing assessment, ORS 308.510(5). Companies do not by mere contractual coordination acquire the right to control each other's operations. When Cottonbelt and Southern Pacific first began to coordinate their operations in 1930, the Cottonbelt properties did not thereby become Southern Pacific's property. Similarly, integration of marketing, financing, executive services, operations, and labor do not alone show that a company is the property of another, because independent companies could provide each other with any or all of these services. Moreover, even a considerable degree of operational integration shows nothing about the property connection between two companies in an industry so pervasively interconnected as railroading. The proper test of what this statutory scheme includes depends on concepts of property, real and personal, tangible and intangible, used or held    as owner, occupant, lessee, or otherwise. ORS 308.510(1). The term otherwise broadens the definition of property but, construed by the ejusdem generis rule, stays within this familiar arena. These concepts of property are more definite than the wavering tests of operational and economic integration. What shows a property connection between corporations is the right to control the operations of the other company. While overlap of officers is neither necessary nor sufficient to show that one company is the property of another, it is evidence of at least possessory control. Here, Southern Pacific did exert executive control on Cottonbelt's marketing, financing, management, operations and labor, and did so as owner of Cottonbelt. Southern Pacific owns 99.7 percent of Cottonbelt. While the continued existence of a few minority stockholders does impose fiduciary duties and require separation of records, the almost total ownership gives Southern Pacific total control. Some decades ago when its stock holdings were much smaller, there would have been a problem in determining whether Southern Pacific had acquired effective control, but that line has long been crossed. Cottonbelt's railroad operations were used or held by [Southern Pacific] as owner, occupant, lessee, or otherwise. It is equally clear that Southern Pacific used or held Cottonbelt's operations in the performance or maintenance of its designated business of railroading. ORS 308.510(1). The parties agree that Cottonbelt is not excluded from the 1977 amended definition of property as intangible property that represent[s] claims on other property including    all shares of stock in corporations, ORS 308.510(1). [17] The exclusion of shares of stock applies only to investment securities, not to a controlling stock interest in a corporation doing designated railroad business. Because of the appraisal methods used here, the value of the Southern Pacific/Cottonbelt unit would be the same if one corporation owned all the Southern Pacific and Cottonbelt assets directly. [18] Thus, the properties of the subsidiary corporation, Cottonbelt, are property of the parent, Southern Pacific, and the two may be valued as a unit within the constraints of fairness. Where one railroad has stock control, common officers, and effective control of a separately incorporated carrier, combined valuation is recommended by modern appraisal practices [19] and is permitted by the federal constitution. [20] We have noted that any allocation which satisfies the statutory requirement of fairness thereby satisfies the federal constitution. Plaintiff argues that the larger valuation unit would result in a massive shift of revenues to Oregon that would distort the allocation unfairly and hence unconstitutionally. [21] The direction that revenues would be shifted is irrelevant; our reasoning would have to be the same if the values were reversed. However, the massiveness of the shift is some cause for concern, given that Cottonbelt is much smaller and less valuable than Southern Pacific by every measure except income. See supra note 2. Such disproportion suggests that the allocation formula, applied to the combined unit, may yield a grossly distorted result, Norfolk & Western Railway Co., supra note 11, 390 U.S. at 326, 329, 88 S.Ct. at 1001, 1003. The allocation formula must reflect the peculiarities of a given enterprise, Id., 390 U.S. at 325, 88 S.Ct. at 1000. Even if a combined unit for valuation is proper, the allocation formula must fairly reflect the contribution of each state's component in order to satisfy the federal constitution. In this appeal  unlike Burlington Northern v. Dept. of Rev., 291 Or. 729, 635 P.2d 347 (1981), and Pacific Power & Light Co. v. Dept. of Revenue, 286 Or. 529, 596 P.2d 912 (1979)  the valuation and allocation formulae are not before us. Nevertheless, we must ensure that the statutory and constitutional requirement of fairness is met. Here the Tax Court carefully tailored the methods for valuation and allocation to the character of the enterprise included in the unit. The weight assigned each element in the allocation reflected the proportional operating expenses associated with that element. To reverse the finding of the valuation unit while leaving the rest of the judgment untouched might introduce unfairness, because the three findings are interconnected. Although Southern Pacific did not cross-appeal, on remand the Tax Court shall consider whether the valuation and allocation formulae should be adjusted. Reversed and remanded to Oregon Tax Court.