240 Va. 108 | Va. | 1990
delivered the opinion of the Court.
In this appeal, we decide whether the State Tax Commissioner’s assessment of railroad real estate based upon an appraisal technique known as the “unit method” is consistent with the provisions of Article X, § 2 of the Constitution of Virginia. As pertinent, that section provides: “[a] 11 assessments of real estate and tangible personal property shall be at their fair market value, to be ascertained as prescribed by law.” Id.
In general terms, the unit method, as applied in this case, involves an appraisal of all railroad property as a single operating unit or a “going concern.” The railroad’s weighted average net income over a period of years is capitalized by dividing this aver
The Richmond, Fredericksburg and Potomac Railroad Company (RF&P) owns approximately 420 acres of land (Potomac Yard) in Arlington County and the City of Alexandria, most of which are used as a railroad marshalling yard.
Until 1984, the State Corporation Commission (SCC) was responsible for appraising and then assessing railroad operating real estate pursuant to former Code §§ 58-503.1 and -522. The SCC appraised and assessed each of RF&P’s operating real properties in each taxing jurisdiction, and then totaled these results in each jurisdiction. Consequently, there was no apportionment among the taxing jurisdictions. Each taxing jurisdiction levied its tax by applying its tax rates to the SCC’s assessed total values for that jurisdiction.
We have reviewed and generally approved SCC tax assessments of Potomac Yard in three previous cases. Railroad Company v. Commonwealth, 203 Va. 294, 124 S.E.2d 206 (1962) (RF&P I); RF & P v. Corporation Commission, 219 Va. 301, 247 S.E.2d 408 (1978) (RF&P II); RF&P R.R. Co. v. State Corp. Comm., 230 Va. 260, 336 S.E.2d 896 (1985) (RF&P III). In 1983, the
Effective in 1984, the General Assembly transferred the railroád assessing function from the SCC to the Department of Taxation, acting through the commissioner. See Code §§ 58.1-2600 and -2655 (specifically transferred by Acts 1983, c. 570). Using the unit method, the commissioner appraised and thereafter assessed essentially the same property
On December 31, 1986, pursuant to the provisions of Code § 58.1-2670, the County Board of Arlington filed an “Application For Correction Of Erroneous Assessment” with respect to the commissioner’s 1984 assessment of Arlington’s portion of Potomac Yard, naming the Commonwealth of Virginia, the department, and RF&P as defendants. Arlington was later permitted to amend its application in order to challenge the 1985 through 1987 assessments as well. On September 1, 1987, the City of Alexandria filed a similar application, based on the commissioner’s assessments of Alexandria’s portion of Potomac Yard for 1984 through 1986, and later was allowed to add the assessment for 1987. These cases were later consolidated. On June 14, 1989, after hearing evidence, the trial court denied the applications and sustained the commissioner’s assessments. Arlington and Alexandria appeal.
Code § 58.1-202(1) empowers the commissioner to administer the tax laws “with a view to ascertaining the best methods of reaching [taxable property and] effecting equitable assessments.” Furthermore, Code § 58.1-2655 directs the department annually to assess railroad real property “upon the best and most reliable information that can be procured.” Accordingly, the department argues that the commissioner has the discretion to utilize the unit method as one of several possible appraisal methodologies.
We observed in RF&P I that “[wjhatever the rule may be in other jurisdictions, the plain provision of Section 169 [now Article X, § 2] of the Constitution which requires all real estate to be assessed at its fair market value is the only legal rule which can be used for the assessment of real estate in Virginia.” 203 Va. at 299, 124 S.E.2d at 209-10 (citation omitted). Generally, in assessing real estate for local taxation, the commissioner should seek to determine its fair market value by a consideration of its highest and best use in its particular location. See generally RF&P I, RF&P II, RF&P III.
The commissioner testified, however, that his appraisals do not reflect the fair market value of Potomac Yard in its particular location, but do reflect its fair market value as a part of the railroad unit. This, however, is merely the “use value” of Potomac Yard. Use value is defined as
the value a specific property has for a specific use. Use value focuses on the contributory value of the real estate to the enterprise of which it is a part, without regard to its highest and best use or the monetary amount that might be realized upon its sale.
American Institute of Real Estate Appraisers, The Appraisal of Real Estate 20 (9th ed. 1987) (emphasis in original) (the manual).
The manual describes the three generally accepted “approaches” to ascertaining market value of real estate as those of “sales comparison,” “income capitalization,” and “cost.” Id. at 70-71. Similarly, we have referred to these as the “market data (comparable sales), capitalization of income, and reproduction cost less depreciation” methods of real estate appraisal. Arlington County Board v. Ginsberg, 228 Va. 633, 639, 325 S.E.2d 348, 351 (1985).
The unit method simply defines the parameters of what is being valued under the capitalization of income method. The issue here is whether this method can be used when it does not produce the fair market value of the specific property being appraised.
First, when rental property income is capitalized, only the rental income of the assessed property is capitalized. Here, the income capitalized is the operating income of a larger property or entity of which Potomac Yard is only a part.
Second, rental property income is typically the primary basis for a rental property’s value.
Moreover, we have noted the incompatibility of “the unit approach and the Virginia system of taxation of railroad properties.” N. and W. Ry. Co. v. Commonwealth, 211 Va. 692, 699, 179 S.E.2d 623, 629 (1971).
Because the commissioner’s method of appraisal did not determine the fair market value of Potomac Yard in its particular location, as required by the Constitution of Virginia, we conclude that his assessments were invalid and that they cannot be sustained. Therefore, we will reverse the judgment of the trial court and remand the case for further proceedings consistent with this opinion.
Reversed and remanded.
RF&P also owns noncarrier or nonoperating land adjacent to Potomac Yard which is appraised and assessed by the localities. It is not involved in this appeal.
Potomac Yard’s assessed acreage varied slightly each year. Also, without a separate valuation, the commissioner included the value of railroad personalty, machinery, furniture, and utility lines in its annual “other apportioned value” amounts.
In general, the assessed values increased each year because of RF&P’s increased income.
The department and RF&P also note that a number of other states authorize or require the use of the unit method of appraisal. However, they cite no jurisdictions with constitutional and statutory provisions similar to those in Virginia. Neither Virginia’s constitution nor its statutes contain any reference to the unit method in assessing real estate of public service corporations.
In contrast, under the commissioner’s method of appraisal, the average of the “other apportioned values” during the years 1984-1987 was only about 60 percent of the average of RF&P’s total capitalized values during the same period.
The department and RF&P seek to distinguish N. and W. Ry. Co. on the ground that the railroad franchise tax, in effect when the case was decided, has since been abolished, thereby changing the scheme of railroad taxation. In our opinion, however, the abolition of the railroad franchise tax provision in the Virginia Constitution (proposed by Acts 1970, c. 763, and ratified by the people on November 3, 1970) did not remove the inconsistency of assessing particular railroad real property based in part on the net income of the entire railroad.
