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: January 17, 1977
-
Filed:
m 8 End
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. 1947. Pursuant
t o s e c t i o n 84-801, R.C.M. 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 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
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. Soo L i n e s a p p e a l e d
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). 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 . STAB found
e r r o r i n DOR's f a i l u r e t o : (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'., Mont . I
P.2d , 33 St.Rep. 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 . The
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 . 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 sec-
t 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 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