Tax law - railroads may not challenge a state's valuation methodologies for ad valorum tax purposes under the 4-R Act - CSX Transportation, Inc. v. State Board of Equalization.

AuthorGentile, Donald
PositionRailroad Revitalization and Regulatory Reform Act of 1976

Railroads May Not Challenge a State's Valuation Methodologies for Ad Valorum Tax Purposes Under the 4-R Act--CSX Transportation, Inc. v. State Board of Equalization, 472 F.3d 1281 (11th Cir. 2006)

Section 306 of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) prohibits states from discriminatorily taxing railroad property. (1) The 4-R Act creates an exception to the Tax Injunction Act (TIA) by granting federal courts jurisdiction to hear cases in which railroad companies allege tax discrimination by states. (2) In CSX Transportation, Inc. v. State Board of Equalization, (3) the Eleventh Circuit Court of Appeals considered whether, under the 4-R Act, a railroad company may challenge the valuation methodologies a state uses for ad valorum tax purposes. (4) The Eleventh Circuit ruled that a party may not challenge a state's valuation methodologies in federal court because Congress failed to unequivocally demonstrate its intent to allow such a challenge. (5)

CSX Transportation, Inc. (CSX), a railroad company, filed an action against the State Board of Equalization of the State of Georgia (Board) in the United States District Court for the Northern District of Georgia. (6) CSX challenged the valuation methodologies of the Department of Revenue of the State of Georgia (Department) in assessing its rail transportation property for the 2002 tax year. (7) The Department applied the unit rule along with three different valuation methods and arrived at a unit value of $8.2 billion, which the Board approved. (8) CSX argued that the valuation methods the Department employed produced a discriminatory unit value. (9) At trial, CSX introduced testimony from an expert who applied different valuation methodologies and arrived at an approximate unit value of only $6 billion. (10) Based on its expert's valuation, CSX argued that the maximum value of its property for 2002 tax purposes could not exceed $6 billion. (11)

The district court considered whether the Department was allowed to use any accepted method of valuation or whether it was required to use a specific method under the 4-R Act. (12) The court relied on the legislative history of the 4R Act and held that a state may use any rational, non-discriminatory methodology it chooses to assess property value. (13) The district court ultimately ruled against CSX, holding that a party cannot challenge a state's rational and non-discriminatory valuation methodology under the 4-R Act. (14)

CSX appealed to the United States Court of Appeals for the Eleventh Circuit. (15) Arguing that it should be allowed to challenge the Department's valuation methodologies under the 4-R Act, CSX contended that rules of federalism and comity should not factor into the court's analysis. (16) The Eleventh Circuit rejected CSX's argument and recognized that that the 4-R Act is subject to a clear statement rule regarding Congress's intent. (17) The Eleventh Circuit held that parties cannot challenge a state's valuation methodologies under the 4-R Act because Congress did not intend to allow such actions. (18)

Deeply rooted in the United States legal system is the principle that individual states have the power to tax, free from interference by the federal government. (19) Federalism and comity are the foundational principles upon which federal courts rely to abstain from meddling in controversies over state taxation between states and their citizens. (20) In 1937, Congress enacted the TIA in an effort to codify this precedent. (21) The TIA prohibits federal courts from interfering with a state's power to tax its citizens. (22) In 1976, Congress enacted the 4-R Act to combat discriminatory state tax practices that were threatening the future of the railroad industry as well as interstate commerce. (23) The 4-R Act provided an exception to the TIA by granting federal courts jurisdiction to hear taxpayer challenges when states tax railroad property at a rate grossly disproportionate to other businesses. (24)

Federal courts have long held that the 4-R Act allows a railroad to challenge property classifications, facially discriminatory assessments, and other forms of tax discrimination under the 4-R Act. (25) Because the Supreme Court intentionally left the issue undecided in Burlington Northern Railroad v. Oklahoma Tax Commission, (26) however, a circuit split exists as to whether federal courts can consider the actual methodology states use to calculate value. (27) In Chesapeake Western Railway v. Forst, (28) the Fourth Circuit decided this issue in the negative, reasoning that express authorization for such a challenge, as required by the TIA, is absent from the 4-R Act. (29) The Ninth Circuit, in Burlington Northern Railroad v. Department of Revenue, (30) reached the opposite conclusion, holding that a state's valuation methodologies may be successfully contested by "clear, cogent and convincing evidence." (31) The court reached this conclusion by applying Washington state law, explaining that the 4-R Act demands federal courts apply state law to assessment challenges. (32) In Consolidated Rail Corp. v. Town of Hyde Park, (33) the Second Circuit also held that the 4-R Act allows such a challenge, but only when a state applies a unique valuation methodology to railroads. (34)

The United States Supreme Court, in Department of Revenue of Oregon v. ACF Industries, Inc., (35) tackled the issue of whether a tax levied upon railroad property violates the 4-R Act when a vast amount of other commercial and industrial property is exempted. (36) Acknowledging that the power to tax traditionally belongs to states, the Court stated that federal law only preempts this power when Congress communicates its "clear and manifest purpose" to do so in the statute. (37) After scrutinizing the 4-R Act, the Court concluded that Congress did not show adequate intent to limit a state's power to exclude railroads from a far-reaching tax exemption. (38)

In CSX Transportation, Inc. v. State Board of Equalization, the Eleventh Circuit considered whether the 4-R Act allows a railroad company to challenge a state's valuation methodology of assessing property for tax purposes. (39) After noting the absence of explicit Supreme Court precedent on the issue, the Eleventh Circuit observed the Fourth, Ninth, and Second Circuits' rulings. (40) Announcing its agreement with the Fourth Circuit's rationale, the court held that the 4-R Act did not allow taxpayers to challenge state valuation methodologies in federal court. (41) The Eleventh Circuit relied on principles of federalism, leading up to and including the TIA, that demand a "hands-off approach" to issues of state taxation. (42)

The Eleventh Circuit acknowledged that the 4-R Act created an exception to the TIA, yet held that principles of federalism and comity are still relevant when a case implicates a traditional state power like taxation. (43) Relying on Department of Revenue v. ACF Industries, the court ruled that the 4-R Act is subject to a clear statement rule. (44) Without Congress's express language in the 4-R Act allowing such action, the Eleventh Circuit reasoned that railroads cannot challenge a state's chosen valuation methodology in federal court. (45)

In ruling that a state's valuation methodology is beyond challenge, the Eleventh Circuit rendered railroads vulnerable to discriminatory tax practices frustrating the purpose of...

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