Amicus Curiae Brief — CSX Transp. v. GEORGIA STATE BD. OF EQUAL.

In the Supreme Court of the Anted States

CSX TRANSPORTATION, INC., PETITIONER

v.

GEORGIA STATE BOARD OF EQUALIZATION, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

D.J. GRIBBIN

General Counsel

Department of

Tra ion

Washington, D.C. 20590

ELLEN D. HANSON

General Counsel

Surface Transportation

oard

Washington, D.C. 20423

PAUL D. CLEMENT

Solicitor General

Counsel of Record

PETER D. KEISLER

Assistant Attorney General

THOMAS G. HUNGAR

Deputy Solicitor General

DOUGLAS HALLWARD-DRIEMEIER

Assistant to the Solicitor

General

ANTHONY J. STEINMEYER

ROBERT D. KAMENSHINE

Attorneys

Department of Justice

Washington, D.C. 20530-0001

(202) 514-2217

QUESTION PRESENTED

Whether, in an action by a railroad under 49 U.S.C.

11501(b)(1) claiming that a State has assessed the railroad’s

property at a higher ratio of assessed value to true market

value than the ratio for other commercial and industrial prop-

erties, the district court may, in determining the railroad’s

true market value, consider evidence of market value derived

from accounting methodologies other than those used by the

State, or whether, as the court of appeals held, the State’s

chosen methodology is binding on the district court.

(I)

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Page

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I. _ In deciding a claim of discriminatory overvaluation

Il.

TABLE OF CONTENTS

under the 4R Act, a federal court is not required to

accept the State’s method of valuation

A.

O°

In providing a remedy against de facto as well

as intentional discrimination, Congress

required the federal courts to make

independent determinations of true market

gee Sh se eat he dick avscecaecs

The text and structure of Section 11501

demonstrate Congress’s intent that federal

courts determine true market value based on

the best evidence available, not blind

adherence to state methodologies .............

The legislative history likewise reflects

Congress’s understanding that state assess-

ments would be measured against a federal

standard of true market value, rather than the

States’ “outdated procedures” ................

The rule adopted by the court of appeals is neither

workable nor justified

A.

The court of appeals’ distinction between

valuation methodology and application is

ephemeral and would lead to standardless

i vikeccdcutuawsgeccenescces

. The determination of a property’s true market

value is a common judicial function that the

courts cannot escape under Section 11501 ......

(IIT)

“ee eneneevereeeene

. 1B

IV

Table of Contents—Continued:

C. The court of appeals’ reliance on concerns of

federal comity is misplaced ....................

CORURIIEMN. «00's Kiba dc cated desis Pinees ba eee eee

TABLE OF AUTHORITIES

Cases:

Batson v. Pearl River County, 35 $.2d 712 (Miss.

BOER; +: n.kin.c 0 cnnebecnaneteteseaeneediaanen

BOEEE Novica csecinadedevndsueytenttaheacsesas tel

Burlington N. R.R. v. Department of Revenne,

ee te SO eee ere

Burlington N. R.R. v. Oklahoma Tax Comm'n,

ee a ee eee

Citicorp Real Estate, Inc. v. Smith, 155 F.3d 1097

GSU sos vonccuvercus\anahebewinewenes ven :

Consolidated Rail Corp. v. Town of Hyde Park,

47 F.3d 473 (2d Cir.), cert. denied, 515 U.S. 1122

=

S

~

ee

CSX Transp., lie. v. Board of Pub. Works, 95 F.3d

SC OGD 6 v Kcncnd caneUhevebuunssueavenee 27

Department of Revenue v. ACF Indus., Ine.,

RE BA eee 2, 8, 29, 30

Dougherty County Bd. of Equalization v. Casto Dev.

Co., 491 S.E.2d 483 (Ga. Ct. App. 1997) ............. 28

Hirsch v. Joint City County Bd. of Tax Assessors,

463 S.E.2d 703 (Ga. Ct. App. 1995) ..............05- 28

Kents 2124 Atlantic Ave., lne., In re, 166 A.2d 763

eas BD 6 ciccacnvesiscdcendsdebne seeeueee te 26

~ é >- =

got "i PES Oa Se 2 wa 8

a Be

V 3

Cases—Continued: Page ?

Louisville & Nashville R.R. v. Department of

Revenue, 736 F.2d 1495 (11th Cir. 1984) ............ 26

McMurray v. Commissioner, 985 F.2d 36 (1st Cir.

tie cide bnasigehépoesocecceses 25 |

Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826

EES SE ree 23

Nordlinger v. Hahn, #5 U.S. 1 (1992) ................ 26 .

Powerex Corp. v. Reliant Energy Servs., Inc., |

EE 15

Rubin v. United States, 449 U.S. 424 (1981) ........... 13

United States v. 50 Acres of Land, 469 U.S. 24 (1984) ... 25

VFB LLC v. Campbell Soup Co., 482 F 3d 624

EEE TERE FOP OEE POT ED 25

Constitution and statutes: .

U.S. Const. Amend. V (Just Compensation Clause) ..... 25 .

Act of Oct. 17, 1978, Pub. L. No. 95-473, 92 Stat. 1337

EG RE a 2

I 2,4, 11

§ 11503(b)(4), 92 Stat. 1446 (49 ULS.C.

EEE SS ll

§ 11503(¢)(1), 92 Stat. 1446 (49 U.S.C.

i ELE EEE 3

| ICC Termination Act of 1995, Pub. L. 104-88,

§ 102(a), 109 Stat. 804 (49 U.S.C. 10101 et seq.) ....... 2

Railroad Revitalization and Regulatory Reform Act of

1976, Pub. L. No. 94-210, 90 Stat. 31:

DE tccbbacebeceecstcccccccescecens 2

§ 306, 90 Stat. 54 (49 U.S.C. 11501) ......... passin

ED wees cocesescvesecveveveess 2

SP A> Set gt ee Ee Dee Ae, re ay ee ee ee ee eee

VI

Statutes—Continued:

re iv. cinececsccnvccevetans

49 U.S.C. 26e(1Xd) (1976) .......... 22. eens

49 US.C. BielZle) (IGTE) .... 22. ccccccccvccess

I opis divcccnsicsoscaasdied

DUBE. BRD) oc cccccccccccceses

IED hc cc vccceccccces senna

GE MED occsccccccsccccessees

os es oo

SE MENEEUID 0 vcsccesccccccssseseuen

i oucets vicaise cecesweaecncosscnnel

Miscellaneous:

Appraisal Inst., Te Appraisal of Real Estate

GED 5 o6n 0 didn 0s oc s¥dedkbe nespeeds 20, 21, 23

James H. Boykin & Alfred A. Ring, Valuation of Real

UCIT Uc ans évdudodcis ov detescecunds 20

Discriminatory Taxation of Common Carriers:

Hearings on S. 927 Before the Subcomim. on

Surface Transportation of the Senate Comm. on

Commerce, 90th Cong., Ist Sess. (1967)... 0. ...2.-. 18

H.R. Rep. No. 725, 94th Cong., Ist Sess. (1975) ......... 2

H.R. Rep. No. 1395, 95th Cong.,2d Sess. (1978) ......... 3 :

International Association of Assessing Officers.

Improving Real Property Assessment:

SE TED TOI 6. oo oi bk cvcdctcncectesves 3 4

.

i

Vil

Miscellaneous—Continued: Page

Committee on Unit Valuation, National Ass’n of Tax

Adm’rs, Appraisal of Railroad and Other Public

Utility Property for Ad Valorum Tax Purposes:

Report of the Committee on Unit Valuation

dint sd wovkent ie tanh cekuoderee chon «a 5, 20, 21

Note, Inequality in Property Tax Assessments: New

Cures for an Old Ili, 75 Harv. L. Rev. 1374 (1962) .... 26

S. Rep. No. 445, 87th Cong., Ist Sess. (1961) ........... 16

S. Rep. No. 1483, 90th Cong., 2d Sess. (1968) ........ 8,17

S. Rep. No. 630, 91st Cong., lst Sess.

ax sthithiatehednbedy et debed kooeee 16, 17, 18, 30

State Tax Discrimination Against Interstate Carrier

Property: Hearing on S. 2289 Before the

Subcomm. on Surface Transportation of the

Senate Comm. on Commerce, 91st Cong., lst Sess.

Siti dee dab usu scabedecbtlenes beens avasces 18

- Teens:

In the Supreme Court of the United States

F

No. 06-1248

{ CSX TRANSPORTATION, INC., PETITIONER :

; v.

: :

: GEORGIA STATE BOARD OF EQUALIZATION, ET AL. .

; ON WRIT OF CERTIORARI :

: TO THE UNITED STATES COURT OF APPEALS :

. FOR THE ELEVENTH CIRCUIT

j BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONER

INTEREST OF THE UNITED STATES

, This case concerns the scope of federal protection against

discriminatory state taxation provided to railroads by Section

306 of the Railroad Revitalization and Regulatory Reform Act

of 1976 (4R Act), Pub. L. No. 94-210, 90 Stat. 54 (49 U.S.C.

11501). The Surface Transportation Board—the independent

federa! agency with responsibility for the economic regulation

of the Nation’s railroads, 49 U.S.C. 721—is charged with fos-

tering economic conditions that allow rail carriers to earn

adequate revenues. The Department of Transportation is the

federal agency charged with, among other functions, oversee-

ing rail safety, 49 U.S.C. 20103 (2000 & Supp. IV 2004), and

thus also has an interest in the financial health of the Nation’s

railroads. The United States has participated as amicus cu-

riae in previous cases regarding the scope of the 4R Act's

protections. See Burlington N. R.R. v. Oklahoma Tar

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Comm'n, 481 U.S. 454 (1987) (Burlington Northern); Depart-

ment of Revenue v. ACF Indus., Tue., 510 U.S. 332 (1994)

(ACF).

STATEMENT

1. The 4R Act was enacted in response to the economic

deterioration of the rail industry. See 4R Act § 101, 90 Stat.

33. Section 11501, originally Section 306 of the 4R Act, fo-

cuses on discriminatory state taxation as a particular cause of

that decline. See § 306, 90 Stat. 54 (49 U.S.C. 11501); H.R.

Rep. No. 725, 94th Cong., Ist Sess. 78 (1975).' After 15 years

of study, Congress had found that discriminatory state taxa-

tion of railroad property “constitute|s] an unreasonable and

unjust discrimination against, and an undue burden on, inter-

state commerce.” 4R Act § 306, 90 Stat. 54 (49 U.S.C. 26¢(1)

(1976)). In order to protect those critically important chan-

nels of interstate commerce, Congress took the extraordinary

step of carving out an exception to the Tax Injunction Act, 28

U.S.C. 1341, and empowered federal courts to enjoin prohib-

ited forms of discriminatory state taxauon. 4R Act § 306, 90

Stat. 54 (49 U.S.C. 11501(¢)).

Section 11501 specifies certain forms of prohibited discrim-

ination and also broadly prohibits States from imposing any

other “tax that discriminates against a rail carrier providing

transportation.” 49 U.S.C. 11501(b)(4). With respect to tax

assessments (and taxes levied or collected on the basis of such

assessments) in particular, the statute requires that a State’s

' The statutory language of the original 4 Act was altered slightly when

Section 306, originally codified at 49 U.S.C. 26¢ (1976), was recodified in 1978

at 49 U.S.C. 11503 (1994) as part of the positive enactment of Title 49. See Act

of Oct. 17, 1978 (1978 Act), Pub. L. No. 95-473, 92 Stat. 1337. The restatement

of prior law effected by the 1978 reenactment was “without substantive

change.” 1978 Act § 3(a), 92 Stat. 1466. In 1995, the provisions of Section 11503

were again reenacted without substantive change but renumbered as Section

11501, as part of a general amendment of Subtitle IV of Title 49 thet abolished

the Interstate Commerce Commission and created the Surface Transportation

Board. ICC Termination Act. Pub. L.. 104-88, § 102(a), 109 Stat. 804.

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(or political subdivisions) assessment of railroad property for

purposes of an ad valorem tax be tested by a simple compari-

son of two arithmetic ratios. Under that test, a State’s assess-

ment practices are unlawfully discriminatory if the ratio of

assessed value to “true market value” (assessment ratio) for

railroad property exceeds the assessment ratio for “all other

commercial and industrial property.” 49 U.S.C. 11501(b)(1).

The statute expresses a preference for establishing the

assessment ratio for non-railroad commercial and industrial

property “through the random-sampling method known as a

sales assessment ratio study.” 49 U.S.C. 11501(b)(1).” If the

assessment ratio for non-railroad commercial and industrial

property cannot be established satisfactorily by that method,

the statute then requires the court to enjoin any discrimina-

tion that is revealed by a comparison of the railroad’s assess-

ment ratio to the assessment ratio for “all other property

subject to a property tax levy in the assessment jurisdiction,”

i.e., a ratio not limited to commercial and industrial property.

49 U.S.C. 11501(¢)(1) (emphasis added).*

* A“sales assessment ratio study” compares the assessed value to the actual

sale price for a representative and statistically valid sample of property within

the assessment jurisdiction. See International Ass'n of Assessing Officers,

Improving Real Property Assessment: A Reference Manual 122-155 (1978).

' Section 11501(c\(1) contains a serivener’s error, which was introduced

when Title 49 was recodified and enacted as positive law in 1978. In the original

4R Act, Congress provided unambiguously that the alternative comparison

ratio (if a sales assessment ratio study of commercial and industrial property

was inadequate) was the ratio of assessed value to true market value of “all

other property in the assessment jurisdiction” subject to tax, /.¢., not just the

ratio of assessed to market value of other commercial property. See 4R Act

§ 206, 90 Stat. 55 (49 U.S.C. 26e(2Xe) (1976)). In 1978, when Congress re-

codified Title 49, the words “commercial and industrial” were inserted into the

description of the denominator of that alternative ratio, but no similar

limitation was added to the numerator, which continues to refer to “all other

property subject to a property tax.” 1978 Act § 11503(¢)(1), 92 Stat. 1446 (49

U.S.C. 11501(¢(1)). The House Report made no reference to the change. See

H.R. Rep. No. 1395, 9th Cong., 2d Sess. 179 (1978). Comparison of the

railroad’s assessment ratio to the ratio indicated by the literal terms of the

“se

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+

A federal court that finds state property tax assessments

to discriminate against railroads is empowered to enjoin the

violation. 49 U.S.C. 11501(c). Congress limited the impact of

the anti-diserimination prohibition, however, by barring the

district court from granting any relief under Section 11501

unless the assessment ratio for the railroad’s property ex-

ceeds the assessment ratio for other commercial and indus-

trial property by at least 5%. /bid.

2. In Georgia, publie utilities (1.e., railroads, investor-

owned electric utilities, investor-owned telephone companies,

pipeline companies, and gas distribution companies) are as-

sessed at the State level. The State Revenue Commissioner,

acting on proposed assessments prepared by the Property

Tax Division of the Georgia Department of Revenue (Depart-

ment), certifies the proposed assessments to each county in

which there is taxable property. Pet. App. 2a-3a. Other prop-

erties, including non-utility commercial and industrial proper-

ties, are assessed locally. See id. at 2a.

Georgia, like most States, assesses public utilities using the

“unit rule,” under which the appraiser “values the entire oper-

ating system * * * asa going concern and integrated whole

irregardless of where it is located,” Pet. App. 30a, and then

multiplies the value of the whole unit “by the percentage of

the entity located within Georgia to determine what portion

of the company should be allocated to the state,” id. at 3a.

statute would be nonsensical, because the latter ratio would be a meaningless

apples-to-oranges comparison of vastly disparate classes of property. Because

the statute would be absurd if applied as written, and because Congress

specified that the enactment of Title 49 was a restatement of prior law “without

substantive change,” that could “not be construed as making a substantive

change in the laws replaced,” § 3ta), 92 Stat. 1466, the reenactment's introdue-

tion of the words “cummercial and industrial” in the denominator of the

comparison ratio in Section 11501(¢)(1) must be deemed a scrivener’s error.

Although this Court quoted the “commercial and industrial” language from

Section 11501(c)(1) in Burlington Northern, 481 U.S. at 462, that language was

not itself at issue and the Court did not analyze the <ignificance of the statutory

change.

9)

The alternative “summation” method, employed by some

States, is to calculate the value of each individual item of tax-

able property owned by the taxpayer within the State in isola-

tion and to then aggregate those discrete values. See Com-

mittee on Unit Valuation, National Association of Tax Adm’rs,

Appraisal of Railroad and Other Public Utility Property for

Ad Valorum Tax Purposes 2 (1954) (Unit Valuation Report).

The methods used to value a company under the unit rule

“fall into three general categories: the sales comparison ap-

proach, the cost approach, and the income approach,” Pet.

App. 3a, which, as their names suggest, derive estimates of

value from, respectively, “actual sales of comparable compa-

nies or properties,” the cost of the company’s property, or the

company’s predicted future income stream. /bid. There are

variations within each of those three basic approaches as well.

For example, under the cost approach, one could select be-

tween original cost or reproduction cost. See Unit Valuation

Report 7-8.

In Burlington Northern, this Court held that the district

court could review a railroad’s claim that the State had vio-

lated the 4R Act’s prohibition against discriminatory assess-

ment ratios by overvaluing the railroad’s assets. The Court

rejected the State’s position that the federal courts must ac-

cept “whatever the State determines the value of the railroad

to be.” 481 U.S. at 461-462. Further, the Court held that a

railroad need not show that “the overvaluation results from

discriminatory intent.” /d. at 463.

In so holding, the Court noted that the railroad’s “sole

challenge [was] to the application of [the State's] methodol-

ogy.” Burlington Northern, 481 U.S. at 468 n.5. Thus, the

Court expressed “no view” as to “whether a railroad may

* * * challenge * * * the appropriateness of the account-

ing methods by which the State determined the railroad’s

value, or is instead restricted to challenging the factual deter-

6

minations to which the State’s preferred accounting methods

were applied.” Jbid.

3. Petitioner, a freight rail carrier that has multiple routes

through Georgia, brought this action under Section 11501 in

the United States Distriet Court for the Northern District of

Georgia against Georgia's State Board of Equalization to chal-

lenge the proposed valuation of the railroad’s operating prop-

erty for ad valorem tax purposes. Pet. App. 24a-25a. Peti-

tioner claimed that for the tax year 2002 the Georgia tax au-

thorities had overestimated the true market value of its trans-

portation property by valuing it at $7.8 billion when its “true

market value * * * did not exceed $6 billion.” /d. at 7a. As

a result, the assessment ratio for its property—when the cor-

rect market value was used—exceeded the ratio for non-rail-

road commercial and industrial property within Georgia.

In 2002, the Department's appraiser, Gregg Dickerson,

made certain changes to the manner in which the State caleu-

lated value under the unit rule. Pet. App. 4a. He discarded a

“capitalized earnings approach” and a “direct capitalization

approach,” two income approaches, in favor of another income

approach—the discounted cash flow approach (DCF )—and a

“market multiple approach,” which values the company by

multiplying its income by a multiple derived from the ratio of

stock price to income for companies engaged in similar lines

of business. Pet. App. 35a. Dickerson retained a “stock and

debt approach,” which the State had already been using. /bid.

For the market multiples approach, Dickerson utilized three

different multiples. /d. at 5a. He thus derived “five values

from these three methods” which ranged from $8.126 billion

to $12.346 billion. /bid. “As he did with all public utilities

that vear, Dickerson selected an amount at the lower end of

that range,” $8.2 billion, in an effort “to avoid potential litiga-

tion.” /bid. He then deducted $400 million “to account for

intangible property not subject to ad valorem taxation” in

Georgia, vielding a final taxable valuation of $7.8 billion. bid.

7

In support of its claim, petitioner offered a valuation report

prepared by its own appraiser, Thomas Tegarden, whose cre-

dentials the district court deemed to be “impeccable.” Pet.

App. 25a. Tegarden used three valuation methods, “(1) a

stock and debt approach, (2) a cost approach, and (3) a yield

capitalization approach,” which is “another variation of the

income approach.” /d. at 35a. He concluded that “the unit

value of the Railroad for tax year 2002 did not exceed $6 bil-

lion.” Jd. at 7a.

4. After a bench trial, the district court concluded that the

State “ha[{d] not discriminated against CSXT in vio! ation of 49

U.S.C. § 11501(b)(1).” Pet. App. 71a. The court held that “the

4-R Act does not generally allow a railroad to challenge the

state’s chosen methodology.” /d. at 42a. Rather, “[a]s long as

the Department’s chosen valuation methods are rational and

were not chosen for the purpose of discriminating against |the

railroad], the court will not second guess the Department’s

choice of methods.” /bid. The court explained that “all five

approaches used by CSXT and the Department * * * are

widely used to value property” and are “accepted valuation

methods.” /d. at 38a.

The court emphasized that, in its view, “the Department

used essentially the same valuation methods for CSXT that it

used for other centrally assessed taxpayers.” Pet. App. 40a.

Given that “at least three different valuation methods” had

been used by each side’s expert to “arrive| | at different con-

clusions * * * under each method,” id. at 41a, it was “clear”

to the court “that the determination of the true market value

of CSXT * * * is, at best, an educated guess.” /d. at 42a.

Finally, the court held that the Department's chosen valuation

methods, all of which “are widely accepted and used by valua-

tion experts,” /bid., “are rational” and therefore not subject

to challenge. /d. at 43a.

5. A divided panel of the court of appeals affirmed. Pet.

App. la-23a. The court began its analysis by concluding that

8

the principle “that a statute will not be construed to burden

states in the exercise of their traditional powers unless it

clearly states its intent to do so,” id. at lla, was applicable

because, in the court’s view, “[t]he selection of a valuation

methodology is a part of th{e} fundamental power” of the

States to tax, id. at 12a. In the court's view, moreover, “[t]he

text of the Act does not clearly state that railroads may chal-

lenge valuation methodologies.” /d. at 14a.

“|T Jo the extent [legislative history] ha[d] any relevance to

[the] inquiry,” the court stated that the legislative history

“supports the conclusion that railroads may not challenge

state valuation methodologies in federal court.” Pet. App. l4a

(quoting ACF, 510 U.S. at 345). The court quoted a Senate

report on a precursor of Section 306. That report stated that

the bill contemplated no change in “assessment standards,

assessment practices, or the assessments themselves,” but

“merely provides a single standard against which all affected

assessments must he measured.” /bid. (quoting S. Rep. No.

1483, 90th Cong., 2d Sess. 22 (1968)). Accordingly, the court

concluded “that railroads may not challenge state valuation

methodologies under subsection (b)(1).” /bid.

Judge Fay dissented, “disagree{ing| with the * * * hold-

ing that the 4-R Act bars the Railroad from challenging the

valuation methodology chosen by the State.” Pet. App. 20a.

Noting that “there are many methodologies that can be used

in assessing the value of property,” id. at 21a, he observed

that “[sJurely a state could not use one method to assess the

market value of railroad property and a different method to

assess other commercial and industrial property if such re-

sulted in a gross discrimination toward the railroad,” id. at

2la-22a. Moreover, he reasoned that “a railroad should be

allowed to challenge the method used in an attempt to prove

that the result of such a method was not the trve market

value of its property.” /d. at. 23a.

SUMMARY OF ARGUMENT

Section 306 of the 4R Act is an anti-discrimination provi-

sion that prohibits de facto discrimination against railroads in

state property taxation. One form of discrimination against

which the Act expressly protects is the practice of assessing

railroads at a higher ratio to their true market value than is

true generally of other commercial properties. In order to

determine whether such discrimination has occurred, the fed-

eral court must ascertain true market value with respect to

both the railroad and other commercial properties. The stat-

ute expressly contemplates a hearing on that question: it

addresses the burden of proof and it specifically references a

presumptively preferred method of valuation for other com-

mercial properties that is to be used if the evidence is “to the

satisfaction of the district court.” 49 U.S.C. 11501(¢c). Based

on those features of the statute, this Court held in Burlington

Northern that the true market value of the railroad is a mat-

ter to be determined by the federal court. The same reason-

ing that led the Court to that result also compels the conclu-

sion that consideration of valuation methodologies different

from those of the State can be part of that determination.

There is nothing sacrosanct about a State’s use of a partic-

ular methodology in determining a railroad’s “true market

value”’; if that is, in fact, a step in the State’s assessment pro-

cess. In fact, the legislative history reflects that the States’

use of certain “outdated procedures,” which yielded inflated

market values for railroads, was one of the problems that

Congress sought to address. The court of appeals’ ruling that

state methodologies are beyond challenge defeats that pur-

pose. Moreover, the court of appeals’ premise—that a State

necessarily chooses a single valuation approach—is itself mis-

taken. The most appropriate valuation approach may vary

from property to property based on individual factual circum-

stances. Moreover, an appraiser often derives multiple indi-

cations of value utilizing various approaches, which must be

10

weighed in light of the particular facts of the case to arrive at

a final value that may not correspond to the value indicated by

any single method. In that circumstance, as when a State

does not even calculate “true market value” as a step in its

assessment process, there is no single State “method” to

which to defer.

There is, moreover, no clear line of demarcation between

the State’s choice of a “method” and its “application.” In this

case, for example, the seemingly different formulae used by

the experts are really different ways of stating the same prin-

ciple, but with slightly different assumptions about peti-

tioner’s future income. The court of appeals’ broad rule that

even the choice among different assumptions in the course of

a Valuation constitutes unassailable “methodology” cannot be

reconciled with Burlington Northern and would render state

appraisals susceptible to easily implemented, unredressable

manipulation.

Federal courts must determine the true market value of

property in many different circumstances, a process that nec-

essarily involves judicial resolution of issues of appraisal

methodology. There is nothing problematic about the courts

doing so in an action under Section 11501(b)(1) as well. Con-

trary to the court of appeals’ apparent assumption, an action

under Section 11501(b)(1) is not an administrative law pro-

ceeding for deferential review of a state appraiser’s valuation,

but rather a de novo action to vindicate a federal right to be

free from discriminatory state tax assessments. It would be

inappropriate in such an action for the federal court simply to

defer to the State’s valuation.

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11

ARGUMENT

I. IN DECIDING A CLAIM OF DISCRIMINATORY OVER-

VALUATION UNDER THE 4R ACT, A FEDERAL COURT IS

NOT REQUIRED TO ACCEPT THE STATE’S METHOD OF

VALUATION

A. In Providing A Remedy Against De Facto As Well As In-

tentional Discrimination, Congress Required The Federal

Courts To Make Independent Determinations Of True

Market Value

Congress enacted Section 306 of the 4R Act to address the

problem of “discriminatory state taxation of railroad prop-

erty.” Burlington Northern, 481 U.S. at 457. Thus, Congress

provided a remedy against any tax that “results in diserimina-

tory treatment of a common carrier by railroad.” 4R Act

§ 306, 90 Stat. 54 (emphasis added) (49 U.S.C. 26¢(1)(d)

(1976)).* Significantly, as this Court explained in Burlington

Northern, Congress forbade “‘acts’ which ‘unreasonably bur-

den and discriminate against interstate commerce’” without

reference “to the intent of the actor.” 481 U.S. at 463 (quoting

49 U.S.C. 11501(b)).

With respect to discriminatory assessments, Section

11501(b)(1) forbids, and Section 11501(c) authorizes the fed-

eral courts to enjoin, States from assessing railroad property

“at a value that has a higher ratio to [its] true market value”

than the corresponding ratio for “other commercial and indus-

trial property.” 49 U.S.C. 11501(b)(1). As the Court recog-

nized in Burlington Northern, “(i]t is clear from this language

that in order to compare the actual assessment ratios, it is

' The 1978 Act replaced the words “results in discriminatory treatment”

with “discriminates,” see 1978 Act § 11503(bX4), 92 Stat. 1446 (49 U.S.C.

11501(bx4)), but that “change| | ‘may not be construed as making a substantive

change in the laws replaced."” Burlington Northern, 481 U.S. at 457 11

(quoting 1978 Act § A(a), 92 Stat. 1466).

12

necessary to determine what the ‘true market values’ are.”

481 U.S. at 461. The Court rejected the argument that the

federal courts must accept “whatever the State determines

the value of the railroad to he.” /d. at 461-462. The statutory

reference to “true market value” is not a reference to a

State’s definition of value for its own assessment purposes.

Rather, the railroad’s “true market value” is a federal ques-

tion “to be litigated in federal court.” Jd. at 462.

In Burlington Northern, the railroad had “not challenged

the valuation methodology” used by the State to determine

the railroad’s value, but had limited its challenge to “the ap-

plication of that methodology.” 481 U.S. at 463 n.5. Thus, the

Court noted, without deciding, the question “whether a rail-

road may, in an action under | Section 11501), challenge in the

district court the appropriateness of the accounting methods

by which the State determined the railroad’s value, or is in-

stead restricted to challenging the factual determinations to

which the State’s preferred accounting methods were ap-

plied.” /bid.

Although Burlington Northern reserved the question, its

logic requires that the federal court also be able to consider

questions of valuation methodology. There is no clear line

that separates methodological choices from mere questions of

application. Moreover, because, as the district court con-

ceded, it is the State’s choice of “a particular methodology

that, to a large extent, predetermines the result,” Pet. App.

38a, foreclosing any challenge to the State’s methodology

would essentially eviscerate the protection afforded by Sec-

tion 11501(b)\(1), particularly if “methodology” is understood

in the broad sense employed by the courts below.

The Burlington Northern Court recognized that Section

11501(b)(1) and (ce) plainly require the reviewing court to de-

termine the “true market value” of the railroad’s property.

There is no indication in the statutory text that Congress

intended to bind the federal! courts to employ the particular

13

methodological judgments adopted by state or local govern-

ment appraisers in performing that inquiry. To the contrary,

the statute reflects Congress’s understanding that a prop-

erty’s “true market value” is a question of fact that is to be

decided by the federal court using the best evidence available

to it, even if that evidence points to an approach that diverges

from the State’s chosen method of valuation or demonstrates

that the State’s methodology is deeply biased or flawed.

Moreover, as discussed below, a rule that rests on a purported

distinction between method and application, allowing litiga-

tion of only the latter, would lead to unnecessary litigation

and produce standardless and unpredictable decisionmaking

regarding the question whether a particular challenge fell on

one side or the other of that ephemeral line. The facts of this

case amply demonstrate the weaknesses of such a rule.

B. The Text And Structure Of Section 11501 Demonstrate

Congress's Intent That Federal Courts Determine True

Market Value Based On The Best Evidence Available, Not

Blind Adherence To State Methodologies

The text of Section 11501 demonstrates that Congress in-

tended the federal courts to determine true market value

using the best evidence available, even when that evidence

departs from the State’s various methodological choices. In

Burlington Northern, the Court found the language of the 4R

Act “clear” in requiring the federal courts “to determine what

the ‘true market values’ are.” 481 U.S. at 461. See zbid. (find-

ing the legislative history “irrelevant” because “the terms of

[the] statute [are] unambiguous”) (quoting Rubin v. United

States, 449 U.S. 424, 430 (1981)). Not only does the 4R Act’s

directive that federal courts independently determine “true

market value” not distinguish between the State's choice of

methodology and its application of that methodology—the

latter of which is unquestionably subject to federal review,

see id. at 462—it affirmatively indicates Congress’s presump-

tive preference for using a particular methodology for deter-

14

mining true market value (viz., a sales methodology) when

feasible and satisfactory to the court, regardless of the

method(s) preferred by the State.

Section 11501(c) provides that “(t]he burden of proof in

determining assessed value and true market value is governed

by State law.” 49 U.S.C. 11501(c). As the Court has recog-

nized, “(i]t would be inconsistent to allocate the burden of

proof as to an issue which could not be litigated in federal

court in the first place.” Burlington Northern, 481 U.S. at

462. Section 11501(c) goes on to provide that if satisfactory

evidence is available, the federal court should generally utilize

“the random-sampling method known as a sales assessment

ratio study (to be carried out under statistical principles ap-

plicable to such a study)” to determine “the ratio of the as-

sessed value of other commercial and industrial property in

the assessment jurisdiction to the true market value of all

other commercial and industrial property.” 49 U.S.C.

11501l(c). In other words, Congress concluded that arms-

length sales that take place in the marketplace are presump-

tively the best evidence of “true market value,” and it directed

the federal courts to rely on such actual sales information

whenever it can be used to determine the ratio of assessed to

true market value of non-railroad commercial and industrial

property “to the satisfaction of the district court.” /bid.

Plainly, it would not be open to a State to object to such evi-

dence on the ground that, for example, the State had deter-

mined the true market value of non-railroad commercial and

industrial property using the income, rather than sales,

method of valuation.

Section 11501(¢c) thus makes clear that Congress expected

the federal courts to calculate the true market value of other

commercial and industrial property by employing a

sales-based approach whenever that method was satisfactory

to the district court—and entirely without regard to the

State’s preferred method(s), if any, for making that determi-

4

;

15

nation. It logically follows that Congress’s use of the same

term—*“true market value”—with respect to railroad property

likewise refers to the value of the property as determined to

the satisfaction of the district court without regard to the

methodology utilized by the State. See Powerex Corp. v. Reli-

ant Energy Servs., Inc., 127S. Ct. 2411, 2417 (2007) (“identi-

cal words and phrases within the same statute should nor-

mally be given the same meaning”). It is inconceivable, for

example, that in light of Congress’s expressed preference for

sales information as evidence of true market value, Congress

would have expected or intended that a State’s methodological

choices could preclude a court from considering the price at

which a railroad was sold at the end of the previous year in

determining its true market value.

The Court considered and rejected in Burlington Northern

the argument that Section 11501(c)’s reference to a particular

method for deriving the true market value of other commer-

cial and industrial property implies, by negative inference,

that Congress did not intend the federal courts to determine

independently the true market value of railroad property.

Rather, “the language of subsection (c) leads to the opposite

conclusion.” 481 U.S. at 462. The statute makes clear that

“assessed value and true market value are subjects for judi-

cial inquiry, and are to be proved,” and the specific reference

in subsection (¢) to a method for proving the ratio for com-

mercial property by a statistical sample is simply a “particu-

lar grant of authority * * * to use statistical methods.”

Ibid. It “raises no implication whatever that the value of an-

other kind of property may not be proved at all.” /d. at 463.

By the same token, it raises no implication that a court is

bound by the State’s choice of methodology for valuing rail-

road property, but instead reflects Congress's expectation

that federal courts would make a determination concerning

“true market value,” and that methodological choices, like

16

other aspects of that inquiry, would be matters for judicial

resolution “to the satisfaction of the district court.”

C. The Legislative History Likewise Reflects Congress's Un-

derstanding That State Assessments Would Be Measured

Against A Federal Standard Of True Market Value,

Rather Than The States’ “Outdated Procedures”

The legislative history confirms that Congress did not in-

tend to bind federal courts to the methodologies used by the

States to evaluate railroad property. Indeed, the contrary

intent is clearly reflected in the Senate Report's recognition

that railroads “are discriminated against as compared to other

property taxpayers in the same jurisdiction, due in large mea-

sure to outdated procedures (which are sometimes deliber-

ately retained) for assessment of property.” S. Rep. No. 630,

91st Cong., lst Sess. 2 (1969) (emphasis added) (quoting In-

terstate Commerce Commission letter, which quoted the re-

port on National Transportation Policy, S. Rep. No. 445,

87th Cong., Ist Sess. 451 (1961) (Doyle Report)). The Doyle

Report noted that “|cjost, whether it be original or reproduc-

tion cost, is poor evidence of system value for railroads,” but

that it nonetheless “remains in use” by States as a valuation

method because “cost is usually a higher figure for railroads

than current cash value.” Doyle Report 456-457. By

“justify[ing] a higher full value” for the railroad through the

use of a cost methodology, a State could “in turn appear to

produce a lower equalized assessment ratio.” /d. at 457.”

Plainly Congress did not forbid the federal courts to scruti-

' The Second Circuit's decision in Consolidated Rail Corp. v. Town of Hyde

Park, 47 F.3d 473. cert. denied, 515 U.S. 1122 (1995), exemplifies the cost meth-

adology” potential to overvalue a railroad’s property. In that case, the New

York State Board of Equalization and Assessment, using a “cost approach,”

determined that Conrail’s property in New York had a “true market value of

$974 million,” which was more than twice the $451 million value indicated by

the “stock and debt” and “income capitalization” methods. /d. at 430.

:

;

”

17

nize those same valuation “procedures” that were the cause of

the problem Congress sought to remedy.

The Senate Report further reflects the Committee's under-

standing that the statutory standard of “true market va‘ue”

was to be the federal standard against which state assess-

ments would be compared in determining discrimination.

S. Rep. No. 630, supra, at 25-26; S. Rep. No. 1483, supra, at

22. The report indicates that the bill did not “require a State

to change its assessment standards, assessment practice, or

the assessments themselves,” but that it did “provide| | a sin-

gle standard”—true market value—“against which all affected

assessments must be measured.” /bid. True market value “is

not a standard for determining value; it is a standard to which

values that have already been determined [7.e., the State’s

assessments] must be compared.” /bid. Thus, “true market

value” is not an assessment method or practice that the St tes

were being required by Congress to adopt. States remain

free to use any method they like in arriving at the numerator

of assessed value. But the denominator of “true market

value” is a federal standard as to which States are not owed

particular deference. That remains true even if states calcu-

late a market value or true market value as a step in their

assessment. Their assessment, including any calculation cf

market value, is taken as a given for purposes of the numera-

tor, but “true market value” in the denominator of Section

11501(b)’s ratio remains a question for the federal court. In-

deed, as discussed at pp. 26-27, infra, some States do not even

attempt to base assessments on true or fair market value.

“True market value” is simply the federal standard to which

state assessments are to be compared in determining whether

a railroad has been subjected to discrimination. Plainly, “true

market value” would not be much of a litmus test if the State’s

own assertions as to true market value were dispositive.

The court of appeals read the above-quoted statement from

the Senate Report as “support|ing] the conclusion that rail-

18

roads may not challenge state valuation methodologies in fed-

eral court.” Pet. App. 14a; id. at 40a-4la. But the assertion

that States are not required to “change” their “assessment

standards, assessment practices, or the assessments them-

selves,” S. Rep. No. 630, supra, at 25, cannot plausibly be read

to suggest that those matters—including “the assessments

themselves”—are binding on the federal courts in the course

of making their independent determinations of “true market

value.” The court of appeals’ reading proves too much, as it

would entirely nullify the Act (and overrule Burlington

Northern) by forbidding any meaningful] examination of true

market value, at least in the many taxing jurisdictions that

purport to “assess” at that value or a fixed proportion thereof.

Throughout the hearings leading up to the enactment of

Section 306, state representatives repeatedly objected to an

assessment-ratio test like the one ultimately adopted by Con-

gress, on the precise ground that it would entail independent

federal court determinations of value.” Notwithstanding those

objections, Congress enacted the assessment ratio approach

into law, signalling its rejection of those concerns. The legis-

lative history thus confirms that Congress did not intend to

limit the discretion of federal courts to employ valuation ap-

proaches different from those utilized by the States.

' See Discriminatory Taxation of Common Carriers: Hearings on S927

Before the Subcom. on Surtace Trausp. of the Senate Comm. on Com merce,

“Oth Cong., Ist Sess. 114 (1967) (statement of Charles F. Conlon); State Tar

Discrimination Against lnterstate Carrier Property: Hearing on S. 2289

Before the Subcom. on Surtace Transp. of the Senate Comm. on Commerce,

#1st Cong., 1st Sess. 09, 102 (1969) (statement of George Kinnear).

19

Il. THE RULE ADOPTED BY THE COURT OF APPEALS

IS NEITHER WORKABLE NOR JUSTIFIED

A. The Court Of Appeals’ Distinction Between Valuation

Methodology and Application Is Ephemeral And Would

Lead To Standardless Collateral Litigation

The approach adopted by the lower courts presupposes a

meaningful and discernible distinction between a State’s

unreviewable choice of a valuation “methodology” and its

reviewable “application” of that methodology. That purported

distinction, however, is far too indeterminate and ephemeral

to support the weight that the lower courts would place upon

it. As the facts of this case demonstrate, valuation “methodol-

ogy” and “application” are often indistinguishable in practice,

and a rule that makes so much turn on the supposed distinc-

tion would only invite unnecessary and ultimately standard-

less collateral litigation about whether various aspects of the

State’s calculations fall on one or the other side of the line.

The rule adopted by the lower courts—that “[tJhe district

court was not allowed to consider a valuation methodology

different from the methodology of the Board,” Pet. App. 15a

(emphasis added)—was based on the mistaken premise that

“each appraisal is based on a particular methodology.” Jd. at

38a (emphasis added). See id. at 12a (deference to the State’s

“selection of a valuation methodology”). Valuation treatises

make elear, however, that in general no single method of valu-

ation produces a property’s “true market value.” Rather, an

appraiser's ultimate estimate of value reflects evidence gath-

ered from a variety of approaches (and techniques within ap-

proaches), the relative strength of which the appraiser weighs

based on the particular facts and circumstances concerning

the property. In most instances, there will be no single state

“methodology” to which the court could defer.

“Appraisers develop an opinion of property value with spe-

cific appraisal procedures that reflect three distinct methods

20

of data analysis: 1. Cost{;] 2. Sales comparison{;] 3. Income

capitalization.” Appraisal Inst., The Appraisal of Real Estate

62 (12th ed. 2001) (Appraisal Inst.). None of those approaches

(or variations on those approaches) yields, in itself, the prop-

erty’s “true market value”; rather, each provides an “indica-

tion of value,” i.e., “evidence of value.” Jd. at 597; Unit Valua-

tion Report 3 (emphasis added). In any given appraisal,

“more than one approach to value is usually applied, and each

approach typically results in a different indication of value.”

Appraisal Inst. 597; James H. Boykin & Alfred A. Ring, Valu-

ation of Real Estate 434 (4th ed. 1993) (Boykin) (“[TJhe ap-

praiser proceeds with an analysis of the data under each of

the value approaches”). Indeed, “several value indications

may be derived in a single approach,” such as different indica-

tions of value derived “from applying income multipliers to

specific types of income, directly capitalizing net income, and

discounting cash flows.” Appraisal Inst. 597.

The ultimate task of the appraiser is to reconcile the dis-

tinct indications of value generated by the different ap-

proaches to reach a final estimate of value. The process of

reconciliation is not simply “a mathematical process involving

mere averaging of the estimates derived under the independ-

ent value approaches.” Boykin 434; see Appraisal Inst. 597-

598. The appraiser’s “task is to weigh the pertinency of such

evidences and to make an objective analysis of each.” Unit

Valuation Report 59. “The appraiser weighs the relative sig-

nificance, applicability, and defensibility of each value indica-

tion and relies most heavily on the approach that is most ap-

propriate to the nature of the appraisal problem.” Appraisal

Inst. 600. The final opinion of value “need not be identical to

the value produced by” any single approach. /bid.

Thus, the lower courts’ assumption that there will be a

single “state methodology” to which to defer is mistaken. In

any given appraisal, the State’s final opinion of value often

will not represent the figure that a single approach would

21

generate, but rather the appraiser’s weighing of the different

“evidences of value.” That weighing process should reflect

the appraiser’s consideration of all the relevant facts, includ-

ing the strength of the data upon which the calculations were

derived and the nature of the property or enterprise being

evaluated. Appraisal Inst. 600. It is impossible to discern

where, in such a situation, the State’s purportedly unreview-

able “choice of methodology” ends and where its “application”

begins.’

The facts of this case demonstrate the difficulty of identify-

ing a principled basis for distinction. Here, it was undisputed

that Georgia did not value all properties in Georgia, or even

all centrally assessed properties, according to a single valua-

tion approach. For each centrally assessed property, the

State “calculat|ed] five values under three different methods

and select{ed] a figure at the low end of the resulting range.”

* At the highest level of generality, when a State is making the initial deter-

mination whether to use the unit rule or the surnmation method to value

railroad or other property, it may be fair to say that the choice is purely one of

methodology, or perhaps even that it is part of the logically prior decision of

what property the State is going to tax. One might argue that there is also a

sufficiently clear methodological dichotomy between a “cost” approach, on the

one hand, and an “income” or “sales” approach, on the other. See Unit

Valuation Report 3 (“The cost approach is a summation appraisal, and as such

may not be regarded as a measure of unit value.”). Even at that level, however.

the distinction becomes much less clear, because although cost is not itself an

indication of unit value, it is “good information to guide judgment. and

therefore is a proper evidence to consider in finding value.” /bid. As discussed

above, most appraisers use a cost approach as just one of many evidences of

value, with the final value opinion being derived from no one approach alone.

There is even more practical overlap between the income and sales approaches.

and moreover the choice of approach even at that high level of generality may

reflect a fact-based assessment of the particular circumstances of the entity to

be valued. In any event, there is simply no discernible line between “methodol-

ogy” and “application” once the appraiser moves past the threshold question

of cost, income, anc/or sales methods and begins selecting sub approaches (c.¢..

DCF versus vield ratio), choosing techniques (¢.q., for determining a discount

rate), and making assumptions and judgments based on the particular facts and

curcurnstances.

22

Pet. App. 17a. The lowest figure could have been generated

by the income approach in the case of one utility, by the stock

and debt approach in the ease of another, and by the market

multiples approach in the case of a third. As the court of ap-

peals recognized, in this case, the State’s selection “of an ap-

praisal amount nearest to the discounted cash flow number

did not reflect the conclusion that discounted-cash flow was

the most accurate of the methods used, only that it was the

lowest.” Jd. at 18a. It is at best awkward to describe the

State’s approach—always to choose the lowest of the calcu-

lated figures—as an “accounting method[]” or “valuation

methodology” to which the courts must defer. And if defer-

ence is due here, it would seem equally applicable to a State’s

decision always to choose a particular method that is well-

established to overvalue railroads relative to other commer-

cial property.

The lower courts’ refusal to consider the “yield capitaliza-

tion” valuation proposed by petitioner’s expert, Tegardcn, on

the ground that it was a different methodology from the

State’s DCF approach further demonstrates the difficulty of

drawing the line that is at the heart of the court of appeals’

rule. The district court recognized Tegarden’s “yield capital-

ization” analysis as a “cousin” to the “discounted cash flow”

analysis used by the State, because both are versions “of the

income approach.” Pet. App. 35a-36a. The court nonetheless

concluded (and the court of appeals agreed, id. at 15a-18a)

that Tegarden’s was “a different valuation method” that could

not be considered, id. at 45a.

That conclusion expands the scope of “methodology” into

the realm of mere assumptions made by appraisers. While

Dickerson and Tegarden expressed their respective ap-

proaches by different formulae, see Pet. App. 36a, the latter

is simply a mathematical shorthand of the former if one as-

sumes, as Tegarden did, that petitioner's income would re-

main level. See J.A. 80-81 (setting out Dickerson’s DCF for-

23

mula, and noting that “|wJhere income has the characteristics

of a perpetuity * * * , the universal capitalization formula,

Value = Income + Rate, can be used”).” Tegarden’s calcula-

tions could likewise have been expressed in Dickerson’s lon-

ger form, with the numerator remaining constant each year.

Thus, the difference between the two formulae boils down to

the appraisers’ differing asswmptions regarding the growth

of petitioner’s future income. An approach that deems ap-

praisers’ mere assumptions to qualify as unreviewable “meth-

odology” would effectively preclude any meaningful review of

state determinations of true market value, because the as-

sumptions made by the appraiser at each step of the process

ultimately determine the outcome of any valuation approach.

See Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 835

(7th Cir. 1985) (Easterbrook, J.) (“It is a simple matter to

increase or reduce the outcome of a cash flow analysis by

200% by making changes in assumptions [such as the firm’s

costs, rate of growth, and the discount rate] that appear by

themselves to be insignificant.”).

In an attempt to justify its conclusion that Tegarden’s ap-

proach could not be considered, the court of appeals held that

“all nonfactual determinations involved in constructing a valu-

ation process, regardless of how broad or narrow they may

be,” qualify as “accounting methods” that a railroad may not

challenge. Pet. App. 17a. In the first place, however, there is

no basis for the court of appeals’ view that an appraiser's par-

ticular assumptions about the best way to value a particular

taxpayer's property are “nonfactual determinations” —surely

the question whether a railroad’s income should be held con-

stant or assumed to increase in future years is more factual

than legal in nature, as are most, if not all, of the myriad of

~ The district court's representation of Dickerson’s discounted cash flow

formula (Pet. App. 34a) contains an error. The court failed to compound the

discount rate in each successive year. Under the correct formula, the

denominator (1 + discount rate) should be squared in vear two, cubed in vear

three, etc. See Appraisal Inst. 688.

24

other assumptions that appraisers must make in selecting,

applying, and weighing various valuation approaches.

Under the court of appeals’ rule, moreover, any valuation

rule that a State can articulate in general terms would appar-

ently become unassailable. For example, if the State were to

adopt a general rule to treat property as obsolete only in cer-

tain circumstances, it could foreclose challenge to its refusal

to make deductions for obsolescence for property that did not

satisfy the rule as articulated by the State. Likewise, if the

State adopted a “methodology” for determining the discount

rate in DCF calculations, such as using the Federal Reserve

Board's federal funds rate, that “nonfactual determination

* * * in constructing (the] valuation process,” Pet. App. 17a,

would seemingly be immune from judicial scrutiny.

Plainly, the court of appeals’ rule cannot be squared with

this Court’s holding in Burlington Northern, in which the

Court specifically held that the district court could adjudicate

petitioner’s challenges to “the State’s evaluation of the cost of

capital” and its “refusal to make deductions for property

which petitioner claims is obsolete.” 481 U.S. at 463 n.5. Yet

there is no other obvious place to draw a principled, meaning-

ful, and judicially manageable line between that which is sub-

ject to judicial review and that which is not.

B. The Determination Of A Property's True Market Value Is

A Common Judicial Function That The Courts Cannot

Escape Under Section 11501

The court of appeals’ reluctance to undertake judicial re-

view of valuation methodologies reflects its view that such an

inquiry would amount to inappropriate “freewheeling judicial

second-guessing.” Pet. App. 17a. The district court likewise

believed that it was being asked to “dictate a particular valua-

tion method to the Department,” which it was not qualified to

do. /d. at 42a. But the valuation of property is a function that

courts routinely undertake, in numerous contexts. Moreover,

because States need not make any attempt to calculate “true

25

market value” in the course of making property assessments,

but instead can use an assessment formula driven by other

factors, such as historical sales prices, courts applying Section

11501 will sometimes have no choice but to make an independ-

ent determination of “true market value,” which necessarily

will entail making determinations regarding methodology.

The court’s role in assessing “true market value” for purposes

of the federal-law denominator is not materially different

whether or not a State calculates market value as a step in its

assessment process. The federal court’s role under Section

11501 is not that of a state court deferentially reviewing ad-

ministrative agency action; rather, it is to conduct a de novo

hearing on whether the State has violated the railroad’s fed-

eral right against de facto discrimination.

The federal courts are routinely called upon to decide ques-

tions of property valuation in contexts other than Section

11501. See, e.g., l/nited States v. 50 Acres of Land, 469 U.S.

24, 29-30 (1984) (Just Compensation Clause); VF'B LLC v.

Campbell Soup Co., 482 F.3d 624, 632 (3d Cir. 2007) (action in

bankruptcy to set aside sale of corporate division as fraudu-

lent); Citicorp Real Estate, Inc. v. Smith, 155 F.3d 1097, 1106

(9th Cir. 1998) (determination of property’s fair value in suit

for deficiency judgment); McMurray v. Commissioner, 985

F.2d 36, 40 (1st Cir. 1993) (valuation of land donated to char-

ity in action for tax deficiency). There is no reason to believe

that federal courts are any less competent to weigh expert

testimony regarding valuation issues in litigation under Sec-

tion 11501 than they are in those other contexts.

The courts below believed that Congress intended that

federal courts not make determinations regarding valuation

methodology pursuant to Section 11501(b)(1). To the con-

trary, however, by making a determination of “true market

value” an essential component of any suit under Section

11501(b)(1), and without requiring States to undertake such

a calculation, Congress plainly contemplated that the determi-

26

nation of value (which necessarily entails judgments regard-

ing methodology) was one for the federal courts to make.

Although most States do determine some version of market

value as part of their assessment processes, that is not neces-

sarily the case. Historically, some taxing jurisdictions simply

“estimate[d] the ‘fractional’ valuation directly without even

attempting to first determine full value.” Note, /nequality in

Property Tax Assessments: New Cures for an Old Ill, 75

Harv. L. Rev. 1374, 1379 (1962); see Jn re Kents 2124 Atl.

Ave., Inc., 166 A.2d 763, 767 (N.J. 1961) (when “they valued

new construction, the assessors expressly eschewed any con-

ception of the value of the properties” in favor of drawing an

“assessment” value directly from comparable properties);

Batson v. Pearl River County, 35 S. 2d 712 (Miss. 1948) (up-

holding “arbitrary assessment value of $2.50 per acre” for “all

cut-over lands in the county”). More recently, in Nordlinger

v. Hahn, 505 U.S. 1 (1992), the Court upheld a state constitu-

tional amendment that made it the express policy of the State

nol to tax properties as a percentage of their market value,

but according to a formula based upon their historical value.

Id. at 5-6, 18.

Actions under Section 11501 likewise illustrate that not all

States calculate “true market value” within the meaning of

the 4R Act. See, e.g., Louisville & Nashville R.R. v. Depart-

ment of Revenue, 736 F.2d 1495, 1499 (11th Cir. 1984) (holding

that “full market value” rather than “just value” represents

“true market value for purposes of section [11501]”). Cf. Con-

solidated Rail Corp. v. Town of Hyde Park, 47 F.3d 473, 476

(2d Cir. 1995) (noting New York’s practice of assessing rail-

road property as a percentage of “taxable value,” which dif-

fered from “true market value”). In fact, in the case at bar,

the court of appeals recognized that the figure used by the

State “did not reflect the conclusion that discounted cash flow

was the most accurate of the methods used, only that it was

the lowest.” Pet. App. 18a. Thus, federal courts simply can-

ee eS a - 7 _, “ o , = 7h ge a ee eae

7

7

-

27

f not avoid their responsibility in an action under Section

| 11501(b)(1) to determine the railroad property’s “true market

value” for purposes of the federal statute.

Whereas the court of appeals would preclude review of the

State’s chosen methodology altogether, Pet. App. 15a, the

district court attempted to chart a middle course, allowing

review to determine whether the State’s methodology is un-

reasonable or purposefully discriminatory. The district

court's attempt to reintroduce a threshold element of discrim-

| inatory intent into Section 11501(b)(1) runs directly contrary

to this Court’s holding in Burlington Northern. Moreover,

the district court’s approach, which is analogous to the stan-

dard a court might apply in reviewing agency action, is inap-

propriate for a statute that creates a federal right against de

facto discrimination by the State. The courts of appeals have

recognized as much in selecting the appropriate standard of

proof to govern claims under Section 11501. See CSX

Transp., Inc. v. Board of Public Works, 95 F.3d 318, 323 (4th

Cir. 1996) (action under Section 11501(b)(1) is “an original

action” and “does not involve review of an assessment by a

state agency or other compara)le body”); Burlington N. R.R.

v. Bair, 766 F.2d 1222, 1226 (8th Cir. 1985) (rejecting stan-

dard for administrative review in favor of that for “de novo

review in state court”). But see Burlington N. R.R. v. De-

partment of Revenne, 23 F.3d 239, 241 (9th Cir. 1994) (apply-

ing Washington's “clear, cogent, and convincing evidence”

standard for review of tax assessments).”

" Section 11501(c) provides that the “burden of proof in determining

assessed value and true market value is governed by State law.” 49 U.S.C.

1150l(c). Arguably, the reference to “burden of proof” refers to the question

of which party bears the “burden,” not to the separate question of the standard

of proof that party must bear. Alternatively, if read as referring to the

standard of proof, it should be the State standard for civil proceedings

generally, not for assessment appeals. See Bair, 766 F.2d at 1226. Were it

otherwise, a State might effectively immunize itself from challenge under

Section 11501(b\(1) by imposing an impossibly high standard of proof on those

who challenge assessments in ils own courts. In any event, that question is not

28

Ironically, the approach adopted by the court of appeals

grants state assessors more deference in an action under the

4R Act’s anti-discrimination provision than they enjoy when

their assessments are appealed to Georgia’s own courts. As

the Georgia courts have repeatedly held, “{j)ust and fair valu-

ation of property is a question to be determined by the

factfinder, [7.e.], the trial court.” Dougherty County Bd. of

Equalization v. Casto Dev. Co., 491 S.E.2d 483, 485 (Ga. Ct.

App. 1997). In the “de novo investigation” before the trial

court, the burden is on the initiating party, but “neither party

is entitled to any prima facia presumption regarding the cor-

rectness of its evidence of valuation.” Hirsch v. Joint City

County Bd. of Assessors, 463 S.E.2d 703, 705 (Ga. Ct. App.

1995) (citation omitted). Taxpayers may present the opinions

of their own experts, who are free to offer testimony based on

valuation methods different from those of the State. See, e.g.,

Casto Dev. Co., 491 S.E.2d at 484 (noting that taxpayer’s ex-

pert had criticized “the county's cost approach” and offered

his own multi-approach analysis that “ascribe|d| more weight

to the income approach”). Like an action in Georgia court, an

action in federal court under the 4R Act is a “de novo” pro-

ceeding, in which the railroad should be permitted to prove its

claim of discriminatory taxation with any competent evidence.

C. The Court Of Appeals’ Reliance On Concerns Of Federal

Comity Is Misplaced

The court of appeals believed that its curtailment of federal

court review was compelled by principles of federalism and

respect for the States’ sovereign interest in setting tax policy.

Pet. App. 12a-13a. This Court rejected that argument in

Burlington Northern and it should do so here as well.

In Burlington Northern, the State urged that “injunctive

relief against state taxation offends the principles of comity.”

presented in this case because Georgia permits a de novo hearing, with no

presumption in favor of the State's assessment or its valuation methodology.

See p. 28, snfru.

29

481 U.S. at 464 (citation omitted). The Court disagreed, ex-

plaining that while such “policy considerations * * * may

have weighed heavily with legislators who considered the

Act,” the Court was “not free to reconsider them now.” /bid.

The 4R Act itself, which creates an express exception to the

Tax Injunction Act, 28 U.S.C. 1341, see 49 U.S.C. 11501(c),

makes clear that Congress fully intended to authorize the

federal courts to enjoin prohibited forms of discriminatory

state taxation. Moreover, as Burlington Northern held, the

statute unambiguously establishes “true market value” as an

element of the railroad’s federal claim that must be proved to

the district court's satisfaction. 481 U.S. at 462-464. There is

no basis for the court of appeals’ insistence that Congress also

specify in a “clear statement” (Pet. App. 14a) each element of

“true market value” that the federal court is to determine.

The court of appeals believed that this Court’s more recent

decision in ACF, rather than Burlington Northern, was the

more apposite, but its reliance on ACF was misplaced. There,

the Court held that a State does not violate the 4R Act’s pro-

hibition against “another tax that discriminates against a rail

carrier,” 49 U.S.C. 11501(b)(4), when it exempts certain non-

railroad property from a generally applicable ad valorem tax

without providing a similar exemption for railroad property.

510 U.S. at 347-348. The Court reasoned that “{i]t would he

illogical to conclude that Congress, having allowed the States

to grant property tax exemption in subsections (b)(1)-(3),

would turn around and nullify its own choice in subsection

(b)(4),” which did “not speak with any degree of particularity

to the question of tax exemptions.” /d. at 343. By contrast,

the statutory text and structure of Section 11501(b)(1) and (ce)

makes evident that Congress expected the federal courts to

make an independent determination of “true market value,”

which includes considerations of methodology.

The court of appeals believed that ACF, rather than

Burlington Northern, was more relevant because federal

30

review of the State’s choice of valuation methodology is more

intrusive than review of the State's application of that meth-

odology. Pet. App. lla-12a. In ACF, the Court stressed that

“(p]roperty tax exemptions are an important aspect of state

and local tax policy.” 510 U.S. at 344. But the only “[{ijmpor-

tant question| | of state policy” that the court of appeals iden-

tified regarding valuation methodologies was the possibility

that a State would choose “a simple valuation methodology

rather than a complicated one” due to budget constraints. /d.

at 12a. There is no indication that Congress believed that a

State's refusal to expend resources on an accurate appraisal

should be a defense against a claim of de facto discrimination

under the 4R Act. Indeed, among the problems that the Sen-

ate Report identified and to which the 4R Act was addressed

were the States’ “outdated procedures.” S. Rep. No. 630,

supra, at 2. Nor is there any reason to conclude that the

State’s “methodology” of choosing the lowest of five calcu-

lated values, or its fortuitous use of the discounted cash flow

approach in this case, reflects an “[i]mportant question[]} of

state policy” that implicates the “fundamental power of the

state.” Pet. App. 12a.

CONCLUSION

The judgment of the court of appeals should be vacated.

Respectfully submitted.

¥

“

5

D.J. GRIBBIN

General Counsel

Department of

ransportation

ELLEN D. HANSON

General Counsel

Su Transportation

oard

JULY 2007

31

PAUL D. CLEMENT

Solicitor General

PETER D. KEISLER

Assistant Attorney General

THOMAS G. HUNGAR

Deputy Solicitor General

DOUGLAS HALLWARD-DRIEMEIER

Assistant to the Solicitor

General

ANTHONY J. STEINMEYER

ROBERT D. KAMENSHINE

Attorneys