CSX v. State of Georgia Board of Equalization and Methods for Valuation of Property

One of the major mistakes we in law commit is that we think we know a lot. We think this way because, ultimately, law gets to "judge" every field. That is, nearly every field has rules, regulations and "laws" which govern its operation. If something goes awry, law and its minions storm into the situation, charge people a whole lot of money for doing so and decide how people are to run their lives and even do their work. By so doing, law gets the impression (and often gives it) that it "understands" how the world works. That is, if law has authority over a world, it must therefore understand how that world operates.

But my impression is that law often makes decisions about how others should live their lives without really understanding issues. And, indeed, law sometimes makes a virtue of that lack of understanding. A case like the one under consideration illustrates these issues. In a word, it is a complex case having to do with valuation methods for assement of railroad property. But, what ultimately is at issue is not whether the courts understand and agree that the methods used by the State of Georgia to value CSX's properties within the State are fair, just or accurate; it is simply whether the courts will defer to the calculations and the method of the state in determining value. Let me lay out some of the facts of the case, so you can see what I mean.

Important Facts to Know

The case involves CSX's challenge to the 2002 valuation of its railroad property by the GA Board of Equalization. Under GA law, most commerical property is assessed by county assessment boards, but large public utilities (including railroads) are centrally assessed by the State. The counties in which the utilities' "lines" run can use the State's proposed assessment, but they need not. On the statewide level, the Property Tax Division of the GA Dep't of Revenue prepared assessments for approval by the Board of Equalization for 2002. It calculated CSX's assessed valuation based on the "unit" rule--where the value of the RR as a whole is calculated, and the GA portion of that property is determined by multiplying the unit value by the percentage of CSX rail miles in GA. All agree with this method. As of yet, we have no "case."

In 2002, GA changed valuation methods used to calculate value under the unit rule. In previous years it used three methods: (1) yield capitalization (an income approach); (2) direct capitalization (income approach) and (3) stock-and-debt method (sales comparison approach). Confused yet? Well, you should be, because each of these methods, though possibly explainable to a court, requires lots of numbers to be "filled in" to get to a result. Well, just when we don't understand what we are doing, GA changed its approach. GA replaced the first two of these method with a "discounted cash flow" method ("DCF"; an income approach) and a "market multiples method" (a sales comparison approach).

GA generated five values from using these approaches, though I am not sure how five values are generated using only three methods. In any case, the values generated by the state for CSX's overall property worth ranged from $8.126 billion (using DCF) to $12.346 billion (using market multiples). So much for the "science" of valuation. In order to avoid a lawsuit, as the appraiser drily noted, he assessed the property at $8.2 billion. With deuctions, it was reduced to about $7.8 billion. Now, all of this should convince us that we know next to nothing in law. Let's proceed, though, since we are just getting started.

This 2002 overall unit value for CSX calculated by the GA appraiser ($7.8 billion) turned out to me 47.1% higher than the 2001 valuation. I guess the new methods were helpful for the State, huh? Well, the GA unit value of CSX's property was calculated at $514.9 million, an increase of 36.3% from 2001. The tax liability of CSX to GA as a result went up from $4.6 million in 2001 to $6.5 million in 2002. I would have screamed, too, if someone did that to me.

The Issue in the Courts

So, CSX screamed. The way you scream in law is to file a lawsuit alleging all kinds of things. But after you stop screaming you have to "make your case" that the State screwed up its numbers. How do you do that? By getting your "independent" expert, with "impeccable" credentials, to give to the district court (the suit came under a provision of federal law, the 4 R's Act, 49 USC sec. 11501(b)) different numbers. Well, a certain Thomas Tegarden of Nashville, who used yet three different methods from those of GA of approximating the "true market value" of CSX's property but relied primarily on the "yield capitalization" approach, which think GA had dropped that very year, arrived, not unpredictably, at a number of $6 billion for the value of the CSX properties. This was in line with previous year's assessments. This would yield a GA value of $369.3 million, and a tax assessment in line with that of 2001.

Now, I hasten to say that I only have worked in detail on one big public utility valuation case in my law career, and I saw that in order to argue convincingly for one approach over another, I would have needed considerable training in economics and assessment. But I know enough to say that whenever a system increases valuations by 40% in one year, it is going to put a strain on lots of people.

So, what did the federal district court do? If I were judge I would have recused myself for a variety of reasons, but the judge in this case decided that federal law didn't permit him to evaluate different state valuation methods. To be more "legal" about the issue, the Supreme Court had left open this precise question in its Burlington case (481 US 454 (1987)): whether or not a plaintiff could question state assessment valuation methods. Since 1987 the circuit courts had split on the issue. Some circuit courts framed the issue not so much in economic terms but in "federalism" terms: i.e., the proper balance between state and federal responsibility in our system of government. If federal courts could step in and determine which state valuation method was legal, then you might have an example of undue federal overreaching.

Conclusion

So, both the federal district and circuit courts (472 F2d 1281, 11th Cir (2006)) concluded that the federal courts have no role in assessing the propriety of state valuation methods. Thus, in the lower courts, CSX lost. The Supreme Court will only determine this "federalism" question. Pity. I would love to have seen the Court try to wrestle with various assessment methods...

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