DEPT OF REVENUE v SOO LINES INC
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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, ~istrictJudge 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: - Filed: m 8 End January 17, 1977 Mr. J u s t i c e Frank I . Haswell d e l i v e r e d t h e Opinion of t h e C o u r t . T h i s a p p e a l from t h e d i s t r i c t c o u r t , Lewis and C l a r k County, i n v o l v e s t h e v a l i d i t y of t h e Montana Department o f Revenue's method o f a s s e s s m e n t of t a x e s on t h e Montana p r o p e r t y of a n 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 a p p e a l board (STAB) and t h e d i s t r i c t c o u r t h e l d t h e method of a s s e s s m e n t u s e d by t h e Department o f Revenue (DOR) i n v a l i d , and a s s e s s e d r e s p o n d e n t Soo L i n e s , I n c . Montana p r o p e r t y a t i t s s a l v a g e v a l u e . We reverse. Soo L i n e s i s a Minnesota c o r p o r a t i o n engaged i n r a i l r o a d o p e r a t i o n s i n seven mid-western s t a t e s , i n c l u d i n g Montana. In Montana, Soo L i n e s owns and o p e r a t e s a s p u r 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 , t o g e t h e r with supporting equipment and f a c i l i t i e s . T h i s s p u r l i n e known a s t h e F l a x t o n Branch, e n t e r s Montana from t h e e a s t and r u n s w e s t t h r o u g h S h e r i d a n and D a n i e l s C o u n t i e s . I n l i g h t o f t h e i n t e r c o u n t y na- t u r e o f t h e Soo L i n e s ' Montana o p e r a t i o n DOR d i r e c t l y a s s e s s e d i t s Montana p r o p e r t y . The method of a s s e s s m e n t used by DOR i s t h e i s s u e on a p p e a l . The g e n e r a l method of a s s e s s m e n t used by DOR t o a s s e s s Soo L i n e s , a s w e l l a s a l l o t h e r i n t e r c o u n t y 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 o f a s s e s s m e n t i s de- s i g n e d t o c a l c u l a t e t h e v a l u e of t h e r a i l r o a d ' s o p e r a t i n g p r o p e r t y i n Montana on t h e b a s i s of i t s v a l u e 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 i t s 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 - c o u n t y r a i l r o a d s from T i t l e 84, C h a p t e r 8 , R.C.M. t o s e c t i o n 84-801, R.C.M. 1947. Pursuant 1947, Soo L i n e s f u r n i s h e d t o DOR i t s a n n u a l s t a t e m e n t o f e a r n i n g s , c o s t s , s t o c k , and d e b t i n f o r m a t i o n . Using t h i s a n n u a l s t a t e m e n t , DOR a s s e s s e d t h e r a i l r o a d ' s p r o p e r t y by u s e of t h e u n i t a r y method whereby a t h r e e - f a c t o r 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 allocation 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; Montanavs-system revenue traffic units; Montana-vs-system car and locomotive 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 properties of $159,221. Soo Lines objected to the foregoing assessment on the g r o u n d s i t w a s u n r e a l i s t i c i n view o f t h e f a c t t h a t s u c h a s m a l l p o r t i o n of Soo L i n e s ' p r o p e r t y and b u s i n e s s a c t i v i t y was l o c a t e d i n Montana. Soo L i n e s f u r t h e r complained t h e u s e o f t h e u n i t a r y method o f a s s e s s m e n t r e s u l t e d i n Montana t a x i n g the railroad's out-of-state properties. The r a i l r o a d s u g g e s t e d t h e f o l l o w i n g c h a n g e s b e made i n D O R ' s a s s e s s m e n t scheme: (1) C o s t o f p l a n t as a n i n d i c a t o r o f v a l u e s h o u l d b e t o t a l l y e l i m i n a t e d and o n l y 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 u s e d . ( 2 ) C a p i t a l i z e d income s h o u l d b e a v e r a g e d o v e r a f i v e y e a r p e r i o d r a t h e r t h a n t h e two y e a r p e r i o d c u r r e n t l y u s e d and f u r t h e r t h e income b e c a p i t a l i z e d a t 1 0 % r a t h e r t h a n t h e c u r r e n t 8.25%. ( 3 ) S t o c k and d e b t and c a p i t a l i z e d income s h o u l d b e g i v e n e q u a l w e i g h t when u s e d a s i n d i c a t o r s o f t o t a l s y s t e m v a l u e . ( 4 ) The a p p o r t i o n m e n t r a t i o s h o u l d b e d e t e r m i n e d on a f i v e y e a r c o m p a r i s o n o f Montana-vs-system, r a t h e r than t h e cur- r e n t one y e a r comparison. ( 5 ) I n t h e u s e o f s t o c k and d e b t a s a n i n d i c a t o r o f v a l u e , t h e s t o c k s h o u l d b e v a l u e d on a f i v e y e a r m a r k e t a v e r a g e r a t h e r t h a n t h e c u r r e n t y e a r ' s v a l u e and n o n o p e r a t i n g p r o p e r t y s h o u l d b e s u b t r a c t e d a t i t s m a r k e t v a l u e r a t h e r t h a n book v a l u e . A h e a r i n g b e f o r e DOR was h e l d 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. t o t h e s t a t e t a x a p p e a l b o a r d (STAB). Soo L i n e s a p p e a l e d STAB r e v e r s e d t h e DOR a s s e s s m e n t and remanded t h e case f o r r e a s s e s s m e n t . e r r o r i n DOR's f a i l u r e t o : STAB found (1) d e d u c t 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 r e c o g n i z e p l a n t o b s o l e s c e n c e , 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 F l a x t o n Branch, and t h e r e b y a l l o c a t e . 2 % ( . 0 0 2 ) o f Soo L i n e s ' s y s t e m v a l u e t o Montana. The u n i t a r y method o f a s s e s s m e n t w a s o r d e r e d m o d i f i e d t o a t t a i n t h e f o r e o r d a i n e d r e s u l t of s a l v a g e v a l u e n o t t o exceed $2,000 p e r m i l e . DOR t h e n s o u g h t r e v i e w of t h e STAB d e c i s i o n i n t h e d i s t r i c t c o u r t , and a s k e d t h e c o u r t ' s p e r m i s s i o n t o i n t r o d u c e a d d i t i o n a l e v i d e n c e on t h e amount of r e v e n u e t h a t o r i g i n a t e d on t h e F l a x t o n Branch. P r i o r t o t h e d i s t r i c t c o u r t h e a r i n g , Soo L i n e s f i l e d a s e r i e s of a d m i s s i o n s of f a c t s which s t a t e d t h e amount o f wheat i n t e r m s o f w e i g h t t h a t had o r i g i n a t e d on t h e F l a x t o n Branch. The d i s t r i c t c o u r t r e f u s e d t o a l l o w DOR t o pro- d u c e t h e a d d i t i o n a l e v i d e n c e and o r d e r e d t h e a s s e s s m e n t o f Soo L i n e s ' Montana p r o p e r t y a t a s a l v a g e v a l u e o f $2,000 p e r m i l e o r $121,060. DOR a p p e a l e d t o t h i s C o u r t . The i s s u e on a p p e a l i s a d e t e r m i n a t i o n of t h e p r o p e r method of v a l u a t i o n o f Soo L i n e s ' Montana o p e r a t i n g p r o p e r t i e s . The u s e of t h e t h r e e - f a c t o r , u n i t a r y method of a s s e s s m e n t o f t h e l o c a l property of an i n t e r s t a t e corporation i s hardly novel i n t h i s jurisdiction. T h i s method h a s been approved by t h i s C o u r t r e p e a t e d l y 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 L i g h t Co'., . P.2d , 33 St.Rep. Mont I 1277; Western A i r l i n e s , I n c . v . Michunovich, 149 Mont. 347, 350, 351, 428 P.2d 3 ; Yellowstone P i p e L i n e Co. v . S t a t e Board of E q u a l i z a t i o n , 138 Mont. 603, 611, The g e n e r a l p u r p o s e o f t h e u n i t a r y method o f a s s e s s m e n t 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 , I n c . : " * * * The ' u n i t a r y ' method r e p r e s e n t s an a t t e m p t t o r e a l i z e a f a i r a s s e s s m e n t v a l u e on p r o p e r t y which i s n o t h a b i t u a l l y l o c a t e d i n any g i v e n s t a t e , b u t which i s used e x t e n s i v e l y i n i n t e r s t a t e commerce. The u n d e r l y i n g p h i l o s o p h y of t h e ' u n i t a r y ' method i s t h a t p r o p e r t y s o used forms a p a r t of a n o r g a n i c system and may be a s s e s s e d i n t e r m s o f t h e economic c o n t r i b u t i o n which e a c h component makes t o t h e e n t i r e system. T h i s a p p r o a c h h a s 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 o f t h e Supreme C o u r t o f t h e United S t a t e s . * * * " The r a i l r o a d u r g e s t h i s C o u r t t o h o l d t h e s a l v a g e v a l u e o f t h e r a i l s , t i e s , and roadbed i s t h e a p p r o p r i a t e measure o f t h e v a l u e of t h e F l a x t o n Branch. Soo L i n e s a d m i t s t h e e f f e c t o f i t s r e q u e s t would be t o c r e a t e a n e x c e p t i o n 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 r e g a r d t o t h e a s s e s s m e n t of i n t e r c o u n t y r a i l r o a d property. This request i s j u s t i f i e d , it c l a i m s , 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 o f t h e F l a x t o n Branch. This contention i s without m e r i t . T h e r e i s no e v i d e n c e t h e F l a x t o n Branch i s abandoned o r s c h e d u l e d t o be abandoned i n t h e near future. I n f a c t i n t h e y e a r i n q u e s t i o n t h e shipment o f 141,707 t o n s of wheat o r i g i n a t e d on t h e b r a n c h l i n e . The Union P a c i f i c R a i l r o a d ' s o p e r a t i o n i n Montana i s s i m i l a r t o t h a t o f t h e Soo L i n e s ; i t s o n l y Montana p r o p e r t y i s a s p u r l i n e . u n i t a r y method of a s s e s s m e n t i s used t h e r e a s w e l l . The 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 g i v e n 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 E q u a l i - z a t i o n , 1 6 1 Mont. 1 4 0 , 505 P.2d 102. I f w e were t o v a l u e i t s p r o p e r t y a s Soo L i n e s would have u s d o , w e would be c o m p l e t e l y e l i m i n a t i n g t h e v a l u e of t h e r a i l r o a d s ' f r a n c h i s e and r o l l i n g s t o c k , i n d i r e c t c o n f l i c t w i t h sect i o n 84-802, R.C.M. 1947, which p r o v i d e s i n p e r t i n e n t p a r t : "The s t a t e d e p a r t m e n t of r e v e n u e must a s s e s s t h e f r a n c h i s e , roadway, r o a d b e d , r a i l s , and r o l l i n g s t o c k of a l l r a i l r o a d s o p e r a t e d i n more t h a n o n e c o u n t y . " (Emphasis a d d e d . ) The c a s e s i n t e r p r e t i n g t h e s t a t u t e s d e a l i n g w i t h t h e t a x a t i o n of i n t e r s t a t e e n t i t i e s d e m o n s t r a t e t h e r e a s o n 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 o f a s s e s s i n g i n t e r county r a i l r o a d s . T h i s C o u r t s t a t e d i n Western A i r l i n e s , I n c . : "Thus t h e ' u n i t a r y ' method d e t e r m i n e s n o t o n l y t h e a p p r o p r i a t e s h a r e of t h e e n t i r e e n t e r p r i s e which may be t a x e d by e a c h s t a t e b u t a l s o d e t e r m i n e s t h e 'enhanced v a l u e ' 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 o f i t s b e i n g 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 v a l u e of t h e e n t i r e system, a s a g o i n g c o n c e r n , 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 components. 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
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