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CSX Transportation Inc v. South Carolina Department of Revenue

United States District Court, D. South Carolina, Columbia Division

June 6, 2016

CSX Transportation, Inc., Plaintiff,
v.
South Carolina Department of Revenue and Rick Reames III, Agency Director of the South Carolina Department of Revenue, Defendants.

          FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER

          MARGARET B. SEYMOUR SENIOR UNITED STATES DISTRICT JUDGE.

         This matter is before the court after trial for final disposition of Plaintiff CSX Transportation, Inc.’s (“Plaintiff”) request for declaratory relief. Plaintiff filed a Verified Complaint for Injunction and Declaratory Relief on September 29, 2014, against South Carolina Department of Revenue and Rick Reames, III, Agency Director of the South Carolina Department of Revenue (“Defendants”). ECF No. 1. Plaintiff requested a declaration that South Carolina’s tax treatment of real property owned by railroads under the South Carolina Real Property Valuation Reform Act (“SC Valuation Act”), codified at S.C. Code Ann. § 12-37-3140, violates Section 306(1)(d) of the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”), codified at 49 U.S.C. § 11501(b)(4). Specifically, the S.C. Valuation Act limits increases in the value of commercial and industrial real property for tax assessment purposes to 15% over a five year reassessment cycle; however, this 15% cap on value increases is not extended to real property owned by railroads. Plaintiff asks the court to declare that the S.C. Valuation Act’s exclusion of Plaintiff from the 15% cap constitutes a violation of Section 11501(b)(4) of the 4-R Act.

         On September 29, 2014, Plaintiff filed a Motion for Preliminary Injunction to enjoin Defendants from levying upon or collecting taxes for the 2014 tax year based on an appraised real property value in excess of a 15% increase over Plaintiff’s appraised real property value for the year 2007. After a hearing held on October 29, 2014 (ECF No. 27), the court granted Plaintiff’s Motion for Preliminary Injunction by Order on November 4, 2014. ECF No. 28. Defendants then filed an Amended Answer (ECF No. 42), and moved to dismiss Plaintiff’s complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6) on June 1, 2015. ECF No. 47. Following a hearing held on July 31, 2015, the court denied Defendants’ motion to dismiss. ECF No. 55. The case proceeded to a bench trial, which was held on November 3, 2015. ECF No. 77.

         After hearing the testimony, carefully considering the entire record, weighing the credibility of the witnesses, reviewing the exhibits, and applying the applicable law, the court makes the following findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure 52.[1]

         FINDINGS OF FACT

         1. Plaintiff is an interstate common carrier by railroad. Plaintiff operates in 23 states, including South Carolina. Tr. 14:3; 37:2-14.

         2. Defendant South Carolina Department of Revenue (“South Carolina” or “Department of Revenue”) is an agency of South Carolina. It is charged by law to administer and enforce the revenue laws of the state. See S.C. Code Ann. § 12-4-10.

         3. Defendant Rick Reames, III is the Agency Director of the South Carolina Department of Revenue. Tr. 80:8-9.

         4. Subject matter jurisdiction is proper as this complaint raises a federal question under 49 U.S.C. §§ 11501(b)(4) and 11501(c). See also CSX Transp., Inc. v. Alabama Dep’t of Revenue, 562 U.S. 277, 281 n.2 (2011) (“CSX I”) (stating that 49 U.S.C. § 11501(c)’s limitations against courts providing relief are applicable only to claims brought under Sections 11501(b)(1) and (2)).

         5. Venue is proper pursuant to 28 U.S.C. § 1391(b).

         Railroad Property Tax Scheme 6.

         In South Carolina, all property that is subject to taxation is valued at its true value, also known as its fair market value. S.C. Code Ann. § 12-37-930. There are a variety of methods for calculating fair market value, but in the case of railroad property, state statute requires that the Department of Revenue employ the unit valuation concept to calculate fair market value. S.C. Code Ann. § 12-4-540. The unit valuation concept is useful for appraising properties that are spread over vast geographic areas and bear integrated systems. Tr. 142:23-146:16.

         7. South Carolina generally relies on an “income approach” in calculating railroad unit values. Id. at 16:12-15; 144:6-13; 152:9-12. The income approach approximates the value of a property based on the income the property is earning. Id. The first step in the income approach is for South Carolina to review a company’s prior income statements. Id. at 38:2-14. From the review of prior income statements, South Carolina can ascertain anticipated future profits. Id. at 16:16-22. Anticipated future profits are then divided by the weighted average cost of capital. Id. The resulting amount is the fair market value of the property, which represents the value of all of Plaintiff’s property located across the country. Id. 16:16-25; 17:8-11; 144:14-20.

         8. The next step is to allocate a portion of the calculated unit value to South Carolina. Id. at 17:12-20. This allocation is done by balancing a number of factors, including revenue derived in South Carolina versus revenue derived elsewhere; track miles in South Carolina versus track miles elsewhere; and investment in South Carolina versus investment elsewhere. Id. Once an allocation percentage has been determined, South Carolina applies it to the fair market value, which was previously ...


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