Wisconsin Tax Appeals Commision Docket No. 98-I-211(P)

STATE OF WISCONSIN

TAX APPEALS COMMISSION

BURLINGTON NORTHERN RAILROAD

COMPANY,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

DOCKET NO. 98-I-211

RULING AND ORDER ON
MOTIONS FOR PARTIAL
SUMMARY JUDGMENT

DON M. MILLIS, COMMISSION CHAIRPERSON:

This matter comes before the Commission on cross-motions for partial summary judgment. The parties have stipulated to certain facts and propositions of law, and each party has submitted additional supporting papers and briefs with respect to the motions. Petitioner is represented by Baker, Donelson, Bearman & Caldwell, P.C., by Attorney Gregory G. Fletcher of Memphis, Tennessee. Respondent is represented by Attorney Donald J. Goldsworthy.

UNDISPUTED MATERIAL FACTS

The Commission summarizes the following undisputed material facts based on the facts and exhibits stipulated by the parties and on the supporting papers filed with the Commission:

1. For the period 1991 through 1994, Burlington Northern Railroad Co. ("BNRR"), a Delaware corporation with its principal place of business in Fort Worth, Texas, was an interstate carrier by rail subject to the jurisdiction of the Interstate Commerce Commission (now the Surface Transportation Board).

2. For the period 1991 through 1994, BNRR was a wholly-owned subsidiary of Burlington Northern, Inc. ("BNI"). In September 1995, shareholders of BNI and Santa Fe Pacific Corporation ("SFP") became shareholders of Burlington Northern Santa Fe Corporation ("BNSF"). BNSF was the parent holding company of BNI and SFP, both of which were primarily engaged in the rail transportation business. On December 30, 1996, BNI merged with and into SFP; on January 2, 1998, SFP merged with and into The Burlington Northern and Santa Fe Railway Company.

3. Since at least 1970, and prior to January 1, 1991, BNRR paid state taxes based on its corporate income in 23 states (excluding Wisconsin) and in two Canadian provinces. Since at least 1970, BNRR has owned depreciable property and conducted rail transportation business in 25 states (including Wisconsin) and in two Canadian provinces.

4. BNRR's fiscal year corresponds to the calendar year. For federal income tax purposes, BNRR has used various depreciation methods allowable under the Internal Revenue Code ("IRC"), including Asset Depreciation Range ("ADR") and accelerated cost recovery systems (such as ACRS or MACRS), to calculate its net income subject to tax.

5. Prior to January 1, 1991, railroad corporations (including BNRR) sleeping car companies, and certain car line companies operating in Wisconsin were exempt from Wisconsin income/franchise tax under section 71.03 of the 1985-86 Statutes (subsequently renumbered to section 71.26(1)(a) in the 1987-88 Statutes).

6. Railroad corporations (including BNRR), sleeping car companies, and certain car line companies operating in Wisconsin ceased to be exempt from Wisconsin income/franchise tax on January 1, 1991.

7. BNRR filed timely Wisconsin income/franchise tax returns for the period January 1, 1991 through December 31, 1994 ("BNRR's Original 1991-94 Returns"). On BNRR's Original 1991-94 Returns, BNRR filed as if it had been a "public utility" prohibited by section 71.04(15)(bm) of the 1985-86 Statutes from using accelerated cost recovery systems to compute its depreciation deductions for income/franchise tax purposes.⁽¹⁾

BNRR set the 1991 depreciable tax basis of its depreciable assets as if it had been filing in Wisconsin since its inception as a public utility.

8. On BNRR's Original 1991-94 Returns, in the calculation of the apportionment factor for purposes of apportioning its corporate net income to Wisconsin, BNRR did not include within "gross receipts from carriage" receipts from rail shipments which originated with other railroads but were "interchanged" onto BNRR's line in Wisconsin for further shipment.

9. BNRR's Original 1991-94 Returns did not include in its gross income any imputed interest on loans and advances by BNRR among its subsidiaries and affiliates.

10. In 1995, the Wisconsin Department of Revenue ("Department") commenced a field audit of BNRR for the period January 1, 1991 through December 31, 1994. On March 29, 1996, the Department issued to BNRR a "Notice of Proposed Audit Report."

11. On May 9, 1996, the Department issued a "Notification of Franchise Tax Assessment" to BNRR in the amount of $1,046,736.11. This assessment included the Department's following adjustments on depreciation and apportionment:

A. Pursuant to section 71.265 of the Statutes, adjusted BNRR's original filing position with respect to depreciation by using BNRR's actual federal income tax basis as of December 31, 1990 as BNRR's starting basis for Wisconsin income/franchise tax purposes, and by using BNRR's actual federal income tax depreciation deductions for the audit period to calculate net income before apportionment for Wisconsin income/franchise tax purposes. As calculated by the Department, the tax effect resulting from these adjustments in BNRR's basis and allowable depre-ciation deductions was an increase in tax payable by BNRR of $412,000;
B. Pursuant to Tax 2.475 of the Wisconsin Admin-istrative Code, adjusted BNRR's original filing position with respect to apportionment by including within "gross receipts from carriage" receipts from rail shipments which originated with other railroads outside of Wisconsin and were transferred to BNRR within Wisconsin for further shipment. As calculated by the Department, the tax effect resulting from the adjustment in BNRR's gross receipts from carriage (after, and in addition to, the tax effect resulting from the Department's adjustments to BNRR's basis and depreciation) was an increase in tax payable by BNRR of $275,000; and
C. Pursuant to section 71.30(2) of the Statutes, adjusted BNRR's original filing position with respect to gross income by including in BNRR's gross income imputed interest on loans and advances by BNRR among its subsidiaries and affiliates. As calculated by the Department, the tax effect resulting from this adjustment to BNRR's gross income was an increase in tax payable by BNRR of $45,000.

12. Under date of July 5, 1996, BNRR filed its petition for redetermin-ation objecting to the Department's assessment. In its petition for redetermination, BNRR notified the Department that it was filing amended returns for 1991 through 1994 with respect to the depreciation adjustment and included copies of the amended returns.

13. On July 8, 1996, BNRR filed amended returns for each of the years of the audit period. In its amended returns, BNRR restated its starting basis using a book basis rather than its federal basis for Wisconsin income/franchise tax purposes.

14. On January 9, 1997, the Department denied BNRR's claims for refund set forth in its amended returns for 1991 through 1994. The notice denying the claims for refund informed BNRR that it had 60 days to appeal the Department's denial of its claims for refund. The notice also stated: "Any appeal of this denial will be combined with your appeal of the field audit adjustments."

15. On June 24, 1998, the Department issued its notice of action denying BNRR's petition for redetermination.

16. On August 24, 1998, BNRR filed a timely appeal with the Wisconsin Tax Appeals Commission.

APPLICABLE LAW

Internal Revenue Code

49 USCA § 11501. Tax discrimination against rail transportation property.

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(b) The following acts unreasonably burden and discriminate against interstate commerce, and a State, subdivision of a State, or authority acting for a State or subdivision of a State may not do any of them:

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(4) Impose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Board under this part.

(c) Notwithstanding section 1341 of title 28 and without regard to the amount in controversy or citizenship of the parties, a district court of the United States has jurisdiction, concurrent with other jurisdiction of courts of the United States and the States, to prevent a violation of subsection (b) of this section. Relief may be granted under this subsection only if the ratio of assessed value to true market value of rail transportation property exceeds by at least 5 percent the ratio of assessed value to true market value of other commercial and industrial property in the same assessment jurisdiction. The burden of proof in determining assessed value and true market value is governed by State law. If the ratio of the assessed value of other commercial and industrial property in the assessment jurisdiction to the true market value of all other commercial and industrial property cannot be determined to the satisfaction of the district court through the random-sampling method known as a sales assessment ratio study (to be carried out under statistical principles applicable to such a study), the court shall find, as a violation of this section--

(1) an assessment of the rail transportation property at a value that has a higher ratio to the true market value of the rail transportation property than the assessed value of all other property subject to a property tax levy in the assessment jurisdiction has to the true market value of all other commercial and industrial property; and

(2) the collection of an ad valorem property tax on the rail transportation property at a tax rate that exceeds the tax ratio rate applicable to taxable property in the taxing district.

1999-00 Wisconsin Statutes

227.52 Judicial review; decisions reviewable. Administrative decisions which adversely affect the substantial interests of any person, whether by action or inaction, whether affirmative or negative in form, are subject to review as provided in this chapter, except as otherwise provided by law and except for the following:

(1) Decisions of the department of revenue other than decisions relating to alcohol beverage permits issued under ch. 125.

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1995-96 Wisconsin Statutes

71.75 Claims for refund.

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(5) A claim for refund may be made within 2 years after the assessment of a tax or an assessment to recover all or part of any tax credit, including penalties and interest, under this chapter, assessed by office audit or field audit and paid if the assessment was not protested by the filing of a petition for redetermination. No claim may be allowed under this subsection for any tax, interest or penalty paid with respect to any item of income, credit or deduction self-assessed or determined by the taxpayer or assessed as the result of any assessment made by the department with respect to which all the conditions specified in this subsection are not met. If a claim is filed under this subsection, the department of revenue may make an additional assessment in respect to any item of income or deduction that was a subject of the prior assessment. This subsection does not extend the time to file under s. 71.53(2) or 71.59(2), and it does not extend the time period during which the department of revenue may assess, or the taxpayer may claim a refund, in respect to any item of income or deduction that was not a subject of the prior assessment.

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Stipulation of Law

In addition, the Commission accepts the following acts, statutes, and statements of law stipulated by the parties, after making non-substantive changes for form, accuracy, and relevancy:

General Terms and Principles

1. "Depreciation" is a charge for the recovery of the cost of a tangible asset over its useful life.

2. For purposes of the Wisconsin income/franchise tax, Wisconsin has permitted taxpayers to charge annual depreciation as an expense, thereby decreasing net income subject to tax.

3. Accumulated depreciation on an asset or group of assets generally determines the taxpayer's adjusted "basis" in the asset. The selling price of an asset, less its basis, generally determines the taxpayer's "gain" or loss on the asset for income tax purposes.

4. Beginning with the 1964 taxable year (i.e., the 1964 calendar year or corresponding fiscal year) through taxable year 1971, a taxpayer subject to the Wisconsin income/franchise tax was permitted to deduct from gross income "a depreciation deduction [consisting of] a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)" of property used in the trade or business or held for the production of income. Wis. Stat. § 71.04 (13)(a) (1985-86). "Reasonable Allowance" was to be computed in accordance with rules prescribed by the Department and included at least the following depreciation methods:

(a) Straight line method;
(b) Declining balance method;
(c) Sum of the years-digits method; and
(d) Any other consistent method productive of an annual allowance (subject to certain limitations). Wis. Stat. § 71.04(13)(b) (1985-86).

Depreciation Statutes 1972 to 1981

5. Section 71.04(15)(a) of the Statutes from 1973 to 1980 provided, in part:

. . . [F]or all purposes of the Wisconsin tax on or measured by net income of the 1972 taxable year and taxable years thereafter, the amount of depreciation or amortization on depreciable property allowable as a deduction from gross income shall be limited to the amount allowable as a deduction from gross income under the internal revenue code for federal income tax purposes .

6. The following provisions were found in the Statutes from 1971 to 1980:

Section 71.04(15)(a): In this subsection, "internal revenue code" means such code as applicable to the determination of net income of the calendar year 1972 for federal income tax purposes. In determining the Wisconsin tax on or measured by net income of any year subsequent to 1972, "internal revenue code" means such code as applicable to the determination of net income for such subsequent year for federal income tax purposes or as applicable to determination of net income of 1972 for federal income tax purposes, at the option of the corporation.

Section 71.04(15)(c): Effective as of the first day of each corporation's 1972 taxable year, the Wisconsin adjusted basis for all depreciable property subject to depreciation or amortization under the internal revenue code, except pollution abatement plants or equipment deducted, amortized or depreciated pursuant to sub. (2b), shall be identical to the adjusted basis of such property on such date for federal income tax purposes .

Section 71.04(15)(d): Adjustments for capital expenditures and changes in the amount of depreciation or amortization of depreciable property, other than pollution abatement plants or equipment deducted, amortized or depreciated pursuant to sub. (2b), determined for federal income tax purposes by federal audit or otherwise affecting the net difference between the Wisconsin and federal adjusted basis of depreciable property at the end of the 1971 income year shall be reflected for Wisconsin income and franchise tax purposes by appropriate adjustments in the 5 amortization years and such adjustments and changes affecting a corporation's net income of the 1972 taxable year or taxable years thereafter shall be reflected for Wisconsin income and franchise tax purposes in the year or years to which they relate. Additional assessments or refunds may be made consistent with such adjustments or changes and consistent with this subsection regardless of any limitations otherwise applicable to such year or years.

Section 71.04(15)(e): With respect to depreciable property disposed of in a corporation's taxable year 1973 or thereafter, any difference in adjusted basis for purposes of the federal income tax and the Wisconsin tax on or measured by net income, apart from any difference amortized pursuant to par. (c), shall be taken into account in determining net income in the year of disposition.

Depreciation Changes 1972 to 1981

7. Beginning with the 1972 taxable year, the Wisconsin Legislature required corporations to use depreciation and amortization methods for Wisconsin income/franchise tax purposes that were allowable under the IRC for federal income tax purposes.⁽²⁾

The Legislature stated, in part:

. . . [F]or all purposes of the Wisconsin corporation tax on or measured by net income of the 1972 taxable year and taxable years thereafter, the amount of depreciation or amortization on depreciable property allowable as a deduction from gross income shall be limited to the amount allowable as a deduction from gross income under the internal revenue code for federal income tax purposes, but no deduction for depreciation or amortization for depreciable property may exceed the Wisconsin "income tax cost" (basis) of depreciable property.

See Wis. Stat. § 71.04(15)(a) (1985-86).

8. The Statutes defined "internal revenue code" to be "such code as applicable to the determination of net income of the calendar year 1972 for federal income tax purposes." See Wis. Stat. § 71.04(15)(b) (1985-86).

9. Beginning with the 1972 taxable year, the Statutes also required that a corporation's adjusted basis in depreciable property for Wisconsin income/franchise tax purposes "be identical to the adjusted basis of such property on such date for federal income tax purposes under such code." Section 71.04(15)(c) of the 1979-80 Statutes provided:

Effective as of the first day of each corporation's 1972 taxable year, the Wisconsin adjusted basis for all depreciable property subject to depreciation or amortization under the internal revenue code, except pollution abatement plants or equipment deducted, amortized or depreciated pursuant to sub. (2b), shall be identical to the adjusted basis of such property on such date for federal income tax purposes under such code. . . .

10. In "equalizing" the Wisconsin basis of depreciable assets with the federal basis in 1972, the Legislature recognized that a corporation may have had a different basis for Wisconsin income tax purposes than for federal income tax purposes. Therefore, the Legislature enacted "transition" provisions which required that the net difference between the Wisconsin basis and the federal adjusted basis of depreciable property, as of the 1971 taxable year, be aggregated and taken into, or deducted from, gross income over a five-year period. These transition provisions required, in essence, that if the Wisconsin adjusted basis in the aggregate as of the 1971 taxable year exceeded the federal adjusted basis in the aggregate, the net difference was to be deducted from gross income over five years. If the 1971 federal adjusted basis exceeded the Wisconsin adjusted basis, the net difference was applied to reduce other deductions from gross income over five years. Section 71.04(15)(c) of the 1979-80 Statutes provided, in part:

. . . As of the end of each corporation's 1971 taxable year, the net difference between the Wisconsin and federal adjusted basis of all depreciable property subject to depreciation or amortization for federal income tax purposes, except pollution abatement plants and equipment covered by sub. (2b), shall be aggregated. If the Wisconsin adjusted basis of the aggregate of such property exceeds the federal adjusted basis of such aggregate, one-fifth of such difference may be deducted from gross income to arrive at net income (before apportionment, if any) for Wisconsin income and franchise tax purposes in respect of the income year 1972 and the next succeeding 4 income years. If the federal adjusted basis of the aggregate of such property exceeds the Wisconsin adjusted basis of such aggregate, the other allowable deductions from gross income to arrive at net income (before apportionment, if any) shall be reduced by one-fifth of such difference with respect to the income year 1972 and each of the next succeeding 4 income years, and such reduction shall be made regardless of any disposition made of the underlying depreciable property. If a corporation is dissolved, or merged into or consolidated with another corporation before the termination of the 5-year period, any remaining balance of the net difference between the Wisconsin and federal adjusted basis of such depreciable property as of the end of such corporation's 1971 taxable year shall be deducted from gross income or used to reduce otherwise allowable deductions from gross income, as the case may be, in the year of dissolution, merger or consolidation.

11. For federal income tax purposes, the Economic Recovery Act of 1981 made the Accelerated Cost Recovery System ("ACRS") mandatory for most depreciable property placed in service after December 31, 1980. (See Department Field Audit Section Bulletin No. 84-7, August 3, 1984.)

12. Between 1972 and 1982, the IRC permitted corporations the following depreciation methods:

(a) Use the federal depreciation methods and rates in effect in 1972. As described in Paragraph 1154 of the 1985 U. S. Master Tax Guide, allowable federal depreciation methods prior to 1981 were as follows:

For property placed in service before 1981, . . . depreciation may be computed under the straight-line method, the double declining-balance method, the sum of years digits method, and other "consistent methods" depending on the taxpayer's election in the year the property was placed in service.

(b) For property placed in service after 1980, the Accelerated Cost Recovery System (ACRS) (see Paragraph 1151A of the 1985 U. S. Master Tax Guide), or for property placed in service after 1980, corporations could elect "to recover costs by using a straight-line method over the regular recovery period or a longer recovery period is also available." (See Paragraph 1165 of the 1985 U. S. Master Tax Guide.)

Depreciation Statutes 1981

13. The following provisions were found in the 1981-82 Statutes:

Section 71.04(15)(a): . . . [F]or all purposes of the Wisconsin corporation tax on or measured by net income of the 1972 taxable year and taxable years thereafter, the amount of depreciation or amortization on depreciable property allowable as a deduction from gross income shall be limited to the amount allowable as a deduction from gross income under the internal revenue code for federal income tax purposes. . . .

Section 71.04(15)(em): For corporations listed under par. (bm) 1 and 2, for taxable years ending after December 31, 1980, with respect to the sale, exchange, abandonment or other disposition of property in which gain or loss is recognized by the owner of the property, the Wisconsin adjusted basis of the property shall be determined under this subsection and under the applicable provisions of this chapter.

Section 71.04(15)(f): With respect to any corporation which has, in any year prior to deriving income with a Wisconsin situs for Wisconsin income or franchise tax purposes, taken depreciation or amortization of depreciable property for federal income tax purposes, the federal adjusted basis of its depreciable property as of the beginning of the income year in which such corporation begins operations in this state shall be the Wisconsin adjusted basis of such property. For taxable years ending before January 1, 1981 with respect to any corporation listed under par. (bm) 1 and 2 which has, in any year prior to deriving income with a Wisconsin situs for Wisconsin income or franchise tax purposes, taken depreciation or amortization of depreciable property for federal income tax purposes, the federal adjusted basis of its depreciable property as of the beginning of the income year in which such corporation begins operations in this state shall be the Wisconsin adjusted basis of such property.

Section 71.04(15)(fm): For taxable years ending after December 31, 1980, with respect to any corporation listed under par. (bm) 1 and 2 that has, in any year before it derives any income with a Wisconsin situs for Wisconsin income tax purposes, taken depreciation or amortization of depreciable property, the Wisconsin adjusted basis of that property, as of the beginning of the income year in which the corporation begins operations in this state shall be the adjusted basis that would have been computed under the depreciation provisions of the internal revenue code in effect on December 31, 1980.

14. Section 71.04(15)(d) of the 1981-82 Statutes provided that adjustments for capital expenditures and changes in the amount of depreciation or amortization of depreciable property determined for federal income tax purposes by federal audit for:

. . . 1972 taxable year or taxable years thereafter shall be reflected for Wisconsin income and franchise tax purposes in the year or years to which they relate. Additional assessments or refunds may be made consistent with such adjustments or changes and consistent with this subsection regardless of any limitations otherwise applicable to such year or years.

Depreciation Changes in 1981

15. Beginning in taxable year 1981, the Statutes prohibited "certain utility companies" from using ACRS depreciation deductions for purposes of the Wisconsin income/franchise tax. (See Department Field Audit Section Bulletin No. 84-7, August 3, 1984.) These corporations were required to depreciate property acquired in their 1981 taxable year and thereafter under the IRC as in effect at December 31, 1980 (i.e., the pre-ACRS IRC). Those corporations prohibited from using ACRS to compute their depreciation deductions were specifically identified in section 71.04(15)(bm) of the Statutes from 1981 to 1986 by reference to other statutes as follows:

(a) "Any person, association, company or corporation which is not a light, heat and power company as defined by s. 76.28(1) and which is engaged in the business of transporting or transmitting gas, gasoline, oils, motor fuels, or other fuels, by means of pipelines. . . ." Wis. Stat. § 76.02(5b) (1985-86).
(b) ". . . [A]ny person, association, company or corporation, . . . that engage[s] in any of the following businesses:
1. Generating and furnishing gas for lighting or fuel or both.
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3. Generating, transforming, transmitting or furnishing electric current for light, heat or power.
4. Generating and furnishing steam or supplying hot water for heat, power or manufacturing purposes." Wis. Stat. § 76.28(1)(e) (1985-86).
(c) ". . . [A]ny person operating a telecommunications facility or providing telecommunications services to another person, including the resale of those services provided by another telephone company but not including the common use by contractual agreement of those services provided by a telephone company when that use is not offered to the public for hire." Wis. Stat. § 76.38(l)(c)(1985-86).
(d) "Any person, copartnership, association, company or corporation owning or operating a telegraph or cable line. . . ." Wis. Stat. § 76.02(4) (1983-84).

16. If one of the foregoing "utility companies" first acquired Wisconsin situs income in a taxable year ending in 1981 or thereafter, the adjusted basis for computing Wisconsin depreciation was the "adjusted basis that would have been computed under the depreciation provisions of the Internal Revenue Code in effect on December 31, 1980" (i.e., a pre-ACRS IRC). Wis. Stat. § 71.04(15)(fm) (1985-1986). For those "utility companies" that were prohibited from using ACRS depreciation deductions for purposes of the Wisconsin income/franchise tax beginning in taxable year 1981, Sections 71.04(15)(e) and (em) of the Statutes from 1981 to 1986 provided:

(e) With respect to depreciable property disposed of in a corporation's taxable year 1973 or thereafter to December 31, 1982, any difference in adjusted basis for purposes of the federal income tax and the Wisconsin tax on or measured by net income, apart from any difference amortized pursuant to par. (c), shall be taken into account in determining net income in the year of disposition. This paragraph applies to any taxpayers listed under par. (bm) 1 and 2, beginning with the taxpayer's taxable year 1973 and ending on December 31, 1980.
(em) For corporations listed under par. (bm) 1 and 2, for taxable years ending after December 31, 1980, with respect to the sale, exchange, abandonment or other disposition of property in which gain or loss is recognized by the owner of the property, the Wisconsin adjusted basis of the property shall be determined under this subsection and under the applicable provisions of this chapter.

Depreciation Statutes 1983

17. The following provisions were found in the 1983-84 Statutes:

Section 71.04(15)(b): In this subsection, "internal revenue code" means such code as applicable to the determination of net income of the calendar year 1972 for federal income tax purposes. In determining the Wisconsin tax on or measured by net income of any year subsequent to 1972 except for depreciable property acquired in taxable year 1981 and thereafter by the taxpayers listed under par. (bm) 1 and 2, in this subsection "internal revenue code" means such code as applicable to the determination of net income for such subsequent year for federal income tax purposes or as applicable to determination of net income of 1972 for federal income tax purposes, at the option of the corporation, except that for taxable year 1981 and thereafter "internal revenue code" does not include section 168(f)(8) of the code (relating to a special rule for leases) and except that for property located outside this state and first placed in service by the taxpayer on or after January 1, 1983, "internal revenue code" means that code as amended to December 31, 1980, or the code as applicable to the determination of net income for 1972, at the option of the corporation. In this paragraph, "property" means only property owned by the taxpayer.

Section 71.04(15)(c): Effective as of the first day of each corporation's 1972 taxable year and ending with December 31, 1982, the Wisconsin adjusted basis for all depreciable property subject to depreciation or amortization under the internal revenue code, except pollution abatement plants or equipment deducted, amortized or depreciated pursuant to sub. (2b), shall be identical to the adjusted basis of such property on such date for federal income tax purposes. . . .

Section 71.04(15)(e): With respect to depreciable property disposed of in a corporation's taxable year 1973 or thereafter to December 31, 1982, any difference in adjusted basis for purposes of the federal income tax and the Wisconsin tax on or measured by net income, apart from any difference amortized pursuant to par. (c), shall be taken into account in determining net income in the year of disposition. This paragraph applies to any taxpayers listed under par. (bm) 1 and 2, beginning with the taxpayer's taxable year 1973 and ending on December 31, 1980.

Section 71.04(15)(er): Commencing January 1, 1983, with respect to the sale, exchange, abandonment or other disposition of property in which gain or loss is recognized by the owner of the property, the Wisconsin adjusted basis of the property shall be determined under the applicable provisions of this chapter.

Section 71.04(15)(f): With respect to any corporation which has, in any taxable year prior to deriving income with a Wisconsin situs for Wisconsin income or franchise tax purposes, taken depreciation or amortization of depreciable property for federal income tax purposes, the federal adjusted basis of its depreciable property as of the beginning of the income year in which such corporation begins operation in this state shall be the Wisconsin adjusted basis of such property . . . .

Section 71.04(15)(fm): For taxable years ending after December 31, 1980, with respect to any corporation listed under par. (bm) 1 and 2 that has, in any year before it derives any income with a Wisconsin situs for Wisconsin income tax purposes, taken depreciation or amortization of depreciable property acquired during taxable year 1981 and thereafter, the Wisconsin adjusted basis of that property, as of the beginning of the income year in which the corporation begins operations in this state shall be the adjusted basis that would have been computed under the depreciation provisions of the internal revenue code in effect on December 31, 1980.

Section 71.04(15)(fn): For taxable years ending after December 31, 1982, with respect to any corporation that has, in any year before it derives any income with a Wisconsin situs for Wisconsin income or franchise tax purposes, taken depreciation or amortization of out-of-state depreciable property first placed in service by the corporation on or after January 1, 1983, the Wisconsin adjusted basis of that property, as of the beginning of the income year in which the corporation begins operations in this state, is the adjusted basis that would have been computed under the depreciation provisions of the internal revenue code in effect on December 31, 1980.

Section 71.04(15)(fo): With respect to out-of-state depreciable property first placed in service by the transferor on or after January 1, 1983, acquired by the transferee in a transaction in which under this chapter the adjusted basis of the property in the hands of the transferor also applies to the transferee, the Wisconsin adjusted basis of the property at the date of transfer is the adjusted basis that would have been computed under the depreciation provisions of the internal revenue code in effect on December 31, 1980.

Section 71.04(15)(fp): For taxable years ending after December 31, 1982, with respect to depreciable property, other than mobile equipment as defined in par. (fq), first placed in service by the taxpayer on or after January 1, 1983, for which depreciation has been claimed in computing a taxpayer's Wisconsin income or franchise tax and which is then transferred into or out of this state by the taxpayer, deductible depreciation for the property after the transfer shall be computed under par. (b), and the depreciation or amortization allowed in computing Wisconsin income or franchise tax prior to transfer or used in determining the property's Wisconsin adjusted basis shall be used in computing the property's Wisconsin adjusted basis at the date of transfer.

Section 71.04(fq): For purposes of this subsection, mobile equipment that may move to and from this state, including but not limited to automobiles, trucks, airplanes, equipment licensed to operate on public roads and other equipment movable from job to job, is located in this state if it is licensed or registered, or required to be licensed or registered, in this state. If the equipment is not required to be licensed or registered in any state, it is located in this state if it is in this state for any portion of a day for at least 50% of the number of days during the time between the date on which the equipment is placed in service and the date on which the taxable year during which the equipment is placed in service ends.

18. Section 71.04(15)(d) of the 1983-84 Statutes provided that adjustments for capital expenditures and changes in the amount of depreciation or amortization of depreciable property determined for federal income tax purposes by federal audit for:

. . . 1972 taxable year or taxable years thereafter shall be reflected for Wisconsin income and franchise tax purposes in the year or years to which they relate. Additional assessments or refunds may be made consistent with such adjustments or changes and consistent with this subsection regardless of any limitations otherwise applicable to such year or years.

Depreciation Changes in 1983

19. Beginning in taxable year 1983, the Legislature prohibited the use of ACRS on depreciable property located outside the state of Wisconsin and first placed in service by a corporation on or after January 1, 1983. Corporations with depreciable property located outside Wisconsin were required to depreciate out-of-state property under either: (a) the IRC as applicable to the determination of net income for 1972; or (b) the IRC as amended to December 31, 1980. (See Wis. Stat. § 71.04(15)(b) (1985-86); Department Field Audit Section Bulletin No. 84-7, August 3, 1984.)

20. For a corporation with assets located outside the state of Wisconsin and which first acquired Wisconsin situs income in a taxable year ending in 1983 or thereafter, the Statutes required that the adjusted basis on out-of-state property be the "adjusted basis that would have been computed under the depreciation provisions of the internal revenue code in effect on December 31, 1980." Wis. Stat. § 71.04(15)(fn) (1985-86).

Depreciation Statutes 1987

21. The following provisions were found in the 1987-88 Statutes:

Section 71.26(2)(a): . . . The "net income" of a corporation means the gross income as computed under the internal revenue code as modified under sub (3) plus or minus, as appropriate, an amount equal to the difference between the federal basis and Wisconsin basis of any asset sold, exchanged, abandoned or otherwise disposed of in a taxable transaction during the taxable year, except as provided in par. (b) [applicable to regulated investment companies] and s. 71.45(2) [applicable to insurance companies].

Section 71.26(3)(y): A corporation may compute amortization and depreciation under either the federal internal revenue code as amended to December 31, 1986, as it applies to taxable year 1987, or the federal internal revenue code in effect for the taxable year for which the return is filed, except that property first placed in service by the taxpayer on or after January 1, 1983, but before January 1, 1987, that under s. 71.04(15)(b) and (br),1985 stats., is required to be depreciated under the internal revenue code as amended to December 31, 1980, and property first placed in service in taxable year 1981 or thereafter but before January 1, 1987, that, under s. 71.04(15)(bm), 1985 stats., is required to be depreciated under the internal revenue code as amended to December 31, 1980, shall continue to be depreciated under the internal revenue code as amended to December 31, 1980.

Depreciation Changes in 1987

22. Beginning with the 1987 taxable year, the Statutes required corporations to compute amortization and depreciation under either the IRC as amended to December 31, 1986 or the IRC in effect for the taxable year for which the corporate tax return is filed on property located in Wisconsin and first placed in service after January 1, 1987. See Wis. Stat. § 71.26(3)(y) (1987-88).

23. Thus, beginning with taxable year 1987, a corporation was required to compute depreciation for purposes of the Wisconsin income/franchise tax for assets first placed in service on or after January 1, 1987, under either of the following methods at the taxpayer's election:

(a) the "Modified Accelerated Cost Recovery System" (MACRS); or
(b) the "Alternative ACRS Method," which was, essentially, a straight-line method. As described in Paragraph 1165F of the 1987 U. S. Master Tax Guide, "under the alternative ACRS method, the deduction is computed by applying the straight-line method, the applicable convention and the applicable longer recovery period . . . for the respective class of property."

Corporations were also permitted to claim a different depreciation election for Wisconsin income/franchise tax purposes than was claimed for federal income tax purposes. Thus, a corporation could choose MACRS for federal purposes or the alternative ACRS method, which was essentially a straight-line depreciation method, for Wisconsin purposes. See Wisconsin Corporation Audit Manual § 7-2.5 (1990 6th Ed.).

24. In 1987, section 71.30(1)(a) of the Statutes was enacted providing:

A corporation shall use a method of accounting authorized under the internal revenue code and shall use the same method used for federal income tax purposes if that method is authorized under the internal revenue code.

25. In 1987, section 71.02(1)(c) was enacted (subsequently renumbered as section 71.26(2)(a)) to account for the differences between federal and Wisconsin basis. See Wis. Stat. § 71.26(2)(a) (1987-88).

26. Notwithstanding the adoption of MACRS (or alternative ACRS) effective for taxable year 1987, those "utility companies" singled out by the Legislature in 1981 were required to continue to depreciate any assets placed in service in taxable year 1981 through 1986 under the IRC as amended to December 31, 1980. Moreover, property which was located outside of the state of Wisconsin, and which was placed in service between January 1, 1983 and January 1, 1987, was required to be depreciated under the IRC as amended to December 31, 1980. Wis. Stat. § 71.02(1)(bg)27. (1987-88), renumbered as Wis. Stat. § 71.26(3)(y) (1987-88); Wisconsin Corporation Audit Manual § 7-4.25 (1990 6^th Ed.).

27. As of January 1, 1987, railroad corporations were exempt from Wisconsin's income/franchise tax.

28. As of February 1987, TAX 2.74(10) of the Wisconsin Administrative Code addressed the topic of the beginning basis of a previously exempt corporation as follows:

Adjustments to basis must be made for exhaustion, wear and tear, obsolescence, amortization and depletion to the extent actually sustained in respect of a) any period during which the corporation was engaged in business entirely outside of Wisconsin, or b) any period during which the property was held by a person or organization not subject to income taxation under ch. 71, Stats. The amount actually sustained is that amount charged off on the books of the corporation where such amount is considered by the secretary of revenue to be reasonable. Otherwise the amount actually sustained will be the amount that would have been allowed as a deduction had the corporation been subject to income tax during those periods, determined by the straight line method.

TAX 2.74 became effective March 1, 1965, and was repealed effective March 1, 1990. See Wisconsin Administrative Register, No. 410, February 28, 1990.

29. As of February 1987, Section 7-4.2 of Wisconsin Corporation Audit Manual (1987 5^th Ed.), published by the Department's Audit Technical Services Unit, provided:

7-4.2 Adjustment for Depreciation and Depletion
The purpose of depreciation is to permit the taxpayer to recover tax-free its investment in property as it wears out. Depletion permits the taxpayer to recover its investment in a natural resource as it is extracted.
Basis must be reduced in the year of sale by depreciation, obsolescence, amortization, write-offs and depletion to the extent of the amount allowed as deductions under all Wisconsin tax laws which resulted in a reduction of the taxpayer's taxes in any year, but not less than the amount allowable under all Wisconsin income tax laws. In determining whether the taxpayer received a tax benefit from a deduction claimed in a loss year, it is necessary to consider the effect of the net business loss carryforward provided in s. 71.06. While the taxpayer may have received no benefit in the year of deduction, it may have received benefit in subsequent years if the business loss was carried forward. The annual amount of depreciation allowable must be computed using the method employed by the taxpayer. Where the taxpayer has adopted no method, the computation must be made by the straight-line method. The enactment of s. 71.04(15) for the taxable year 1971 and thereafter, and the "federalization" of depreciation, has for practical purposes negated adjustments in this area.
Study Rule Tax 2.74 carefully. In particular your attention is directed to Subsection 10 of this rule relating to the adjustment of basis by corporations which operated entirely outside Wisconsin prior to commencing operations within Wisconsin, and to corporations which were exempt from taxation for a period before becoming taxable. This provides that adjustment must be made in the year of sale of an asset for depreciation, obsolescence, amortization and depletion sustained during the period of outside operations or exemption as well as for those sustained during the taxable period. The amount of adjustment for the period of outside operations is the amount per the taxpayer's books, if reasonable. Otherwise, the computation must be made on the straight-line method.
As an example of the above we will assume that a savings and loan association purchased its building on January 1, 1947 for $100,000. Income of savings and loan associations was exempt from taxation prior to 1962. As of January 1, 1962 the accumulated depreciation was $37,500. Depreciation deducted from 1962 through 1981 was $50,000. The building was sold on January 2, 1982. The adjusted basis of the building at the time of sale is $12,500 and not $50,000. (This assumes the allowable depreciation was deducted and resulted in a reduction of taxes for 1962 through 1981.)

30. In November 1986, the Wisconsin Legislative Reference Bureau forwarded to the Department for review and comment LRB-0913/2, a draft of a bill before the 1987-1988 Legislature to amend various subsections of sections 71.01, 71.06, and 71.07, and to create new sections 71.04(15)(fg) and 71.07(2)(f) ("LRB-0913/2"). The Legislative Reference Bureau stated the purposes of LRB-0913/2 as follows:

This bill imposes the income and franchise taxes on railroads, sleeping car companies and car line companies and specifies the basis of their property for the computation of the deduction for depreciation and provides a method of apportioning the income of multistate railroads.

31. LRB-0913/2 contained language which specified the basis of the property of any corporation that "ceases to be exempt" was to be contained in a "new section" 71.04(15)(fg). This language was not enacted by the Legislature.

32. In 1987, the Legislature enacted 1987 Wisconsin Act 399 that created section 71.04 of the Statutes (subsequently renumbered as section 71.265 in 1987 Wisconsin Act 411):

The Wisconsin adjusted basis of the property of any corporation that has, in any taxable year before it ceases to be exempt from tax under this chapter, taken depreciation or amortization of depreciable property for federal income tax purposes shall be the adjusted basis of that property as computed for federal income tax purposes as of the beginning of the taxable year in which the corporation ceases to be exempt. The corporation may continue, after it ceases to be exempt, to depreciate that property under the method used previously for federal income tax purposes.

This provision was first effective for taxable year 1988.

Depreciation Statutes 1988 to 2000

33. Section 71.26(2)(a) of the Statutes from 1989 to 2000 provided:

The "net income" of a corporation means the gross income as computed under the internal revenue code as modified under sub (3) . . . plus or minus, as appropriate, an amount equal to the difference between the federal basis and Wisconsin basis of any asset sold, exchanged, abandoned or otherwise disposed of in a taxable transaction during the taxable year, except as provided in par. (b) and s. 71.45(2).

34. Section 71.26(3)(y) of the 1999-00 Statutes provided:

A corporation may compute amortization and depreciation under either the federal Internal Revenue Code as amended to December 31, 1999, or the federal Internal Revenue Code in effect for the taxable year for which the return is filed, except that property first placed in service by the taxpayer on or after January 1, 1983, but before January 1, 1987, that under s. 71.04(15)(b) and (br), 1985 stats., is required to be depreciated under the Internal Revenue Code as amended to December 31, 1980, and property first placed in service in taxable year 1981 or thereafter but before January 1, 1987, that, under s.71.04(15)(bm), 1985 stats., is required to be depreciated under the Internal Revenue Code as amended to December 31, 1980, shall continue to be depreciated under the Internal Revenue Code as amended to December 31, 1980.

35. Section 71.265 of the Statutes for 1987 to 2000 provided:

The Wisconsin adjusted basis of the property of any corporation that has, in any taxable year before it ceases to be exempt from tax under this chapter, taken depreciation or amortization of depreciable property for federal income tax purposes shall be the adjusted basis of that property as computed for federal income tax purposes as of the beginning of the taxable year in which the corporation ceases to be exempt. The corporation may continue, after it ceases to be exempt, to depreciate that property under the method used previously for federal income tax purposes.

Depreciation Changes 1988 to 1993

36. In 1988, the Legislature amended and renumbered the Wisconsin income/franchise tax statutes. As a consequence of such revisions, provisions relating to permissible depreciation deductions were codified in section 71.26(3)(y) (substantially identical to prior section 71.02(1)(bg)27.

37. In 1991 Wisconsin Act 39, the Legislature repealed the exemption from the Wisconsin income/franchise tax for railroad corporations, sleeping car companies, and car line companies, effective for taxable years beginning January 1, 1991.

38. Between 1987 and 1991, railroad corporations, sleeping car companies, and car line companies were the only corporations for which Wisconsin repealed the exemption from the Wisconsin income/franchise tax. The Legislature repealed no other exemptions from the Wisconsin income/franchise tax until taxable year 1995.

39. On February 24, 1993, the Commission decided Beatrice Cheese, Inc. v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203-396 (WTAC 1993). In Beatrice Cheese, the Commission ruled that a portion of section 71.04(15)(b) of the 1983-85 Statutes and a portion of section 71.26(3)(y) of the 1987-88 Statutes, both dealing with ACRS depreciation, discriminated against interstate commerce.

40. In October 1993, the Department issued a Tax Release describing permissible depreciation and basis adjustments in view of Beatrice Cheese. The Tax Release provided, in part:

. . . [A] taxpayer may claim deductions under ACRS on assets located outside Wisconsin and placed in service in any year that ACRS is allowable under the Internal Revenue Code. However, if any years during which another depreciation method was utilized for Wisconsin franchise or income tax purposes are closed to adjustment by the statute of limitations, the difference between the federal and Wisconsin basis of an asset may not be accounted for until the asset is disposed of in a taxable transaction.
A taxpayer is not required to claim a deduction under ACRS. The depreciation method originally claimed, assuming it was properly determined, may be continued until the asset is fully depreciated, or is no longer in service.

CONCLUSIONS OF LAW

1. The claim for refund contained in BNRR's amended 1991 income/franchise tax was timely because it was filed within two years of the Department's assessment and the subject of the claim for refund was the same as one of the subjects of the assessment.

2. BNRR's claims for refund for all of the years at issue are properly before the Commission because the Department's action denying the claims for refund did not become a final order until the other issues raised in BNRR's petition for redetermination were decided by the Department.

3. Congress properly abrogated state sovereign immunity in enacting section 306 of the Railroad Revitalization and Regulatory Reform Act (codified at 49 U.S.C. § 11501) because the remedies provided by section 306(c) are congruous and proportional to unconstitutionally discriminatory acts of states identified by Congress.

4. Section 71.265 does not discriminate against BNRR because it provides the same initial basis for all corporations that first become subject to Wisconsin's income/franchise during or after 1991.

OPINION

Both parties have moved for partial summary judgment. BNRR moved the Commission for an order reversing the Department's denial of BNRR's claim for refund. The basis for BNRR's motion is that Wisconsin's law governing BNRR's initial basis in depreciable assets discriminates against BNRR and violates the Railroad Revitalization and Regulatory Reform Act ("4-R Act").

The Department moved the Commission for an order affirming its action on the petition for redetermination, which included (1) denying BNRR's claims for refund and (2) denying BNRR's objection to the assessment of additional income/franchise taxes based on the use of BNRR's actual federal income tax basis as of December 31, 1990.⁽³⁾

In addition to arguing that the 4-R Act does not preclude the Department's action on BNRR's petition for redetermination, the Department argues that it should prevail based on three jurisdictional arguments: (1) that BNRR's claim for refund for 1991 was not timely, (2) that BNRR's claims for refund for each of the years at issue are not properly before the Commission because BNRR failed to file a timely petition for redetermination, and (3) that BNRR may not object to the Department's actions based on the 4-R Act because the Act violates state sovereign immunity guaranteed by the 11^th Amendment to the U. S. Constitution.⁽⁴⁾

The Commission will first address the jurisdictional issues raised by the Department and then address the implications of the 4-R Act.

Jurisdictional Issues

1991 Return

The Department points out that the unextended due date for the 1991 return was March 15, 1992. Under section 71.75(2), the due date for amending the 1991 return was March 15, 1996, several weeks before the amended returns were filed on July 8, 1996. Section 71.75(5) of the 1995-96 Statutes provided that a claim for refund may be filed within two years of an assessment. This section is limited, however, and does not apply to "any item of income or deduction that was not a subject of the prior assessment." In this case, on its 1991 return, BNRR set the depreciable tax basis of its depreciable assets as if it had been filing in Wisconsin since its inception as a public utility. This approach was rejected by the Department in its May 9, 1996 assessment, in which it adjusted the starting basis of BNRR's depreciable assets to the actual federal income tax basis as of December 31, 1990. In BNRR's 1991 amended income tax return, which amounted to a claim for refund, it selected a third starting point for the basis of its depreciable assets in 1991: its book basis. It is clear that the starting basis for BNRR's depreciable assets in 1991 was the subject of the assessment, and, therefore, this is a permissible subject for BNRR's claim for refund in its 1991 amended income tax return. Therefore, the claim for refund set forth in the 1991 amended return was timely pursuant to section 71.75(5) of the 1995-96 Statutes because it was filed within two years of the assessment issued on May 9, 1996.⁽⁵⁾

Failure to File a Petition for Redetermination

The Department argues that the Commission lacks subject matter jurisdiction to consider the claim for refund with respect to any of the years at issue because BNRR failed to file a petition for redetermination after the Department denied the refund claim on January 9, 1997. On its face, this would appear to preclude consideration by the Commission of the claim for refund. The unique factual circumstances of this case dictate another result. In this case, the petition for redetermination of the assessment incorporates the claim for refund. Moreover, and perhaps more importantly, the notice of the Department purporting to deny the claim for refund confirms that the petition for redetermination incorporated the claim for refund when it stated: "Any appeal of this denial will be combined with your appeal of the field audit adjustments."⁽⁶⁾

Section 227.52 provides for judicial review of administrative decisions of most state agencies. It is well settled, however, that the only administrative decisions that are subject to this judicial review are those which are final. Waste Management of Wisconsin, Inc. v. Dep't of Natural Resources, 128 Wis. 2d 59, 89-90 (1986); Pasch v. Dep't of Revenue, 58 Wis. 2d 346, 356-57 (1973). We believe that this same rule applies to actions of the Department before the Commission.

Section 227.52(1) provides that, with one exception, decisions of the Department are not subject to judicial review. Rather, pursuant to sections 71.88(2) and 73.01(4), actions by the Department on petitions for redetermination are subject to review by the Commission. The mere fact that administrative review of the Department's actions on petitions for redetermination is provided in sections 71.88 and 73.01(4) (as opposed to section 227.52) does not change the requirement that the actions be final.

Here, the action on the claim for refund for the years at issue was not a final decision. All the Department managed to do was to deny BNRR's request to use book value in depreciating its assets. The Department did not act on the other issues pending before the Department⁽⁷⁾

until it denied the petition for redetermination on June 24, 1998. In considering whether an appeal of an order of the Commission is final, the Wisconsin Supreme Court stated:

. . . A taxpayer cannot select one of several issues concerning the department's assessment pending before the commission, present it to the commission in the form of a motion, and achieve a separate review and appeal thereon. All issues arising out of a taxpayer's challenge of an assessment constitute one proceeding before the Commission and issues concerning the commission's determination thereof are to be raised on appeal. . . .

Pasch, 58 Wis. 2d at 358. Because the Commission can entertain only final actions of the Department, the rule stated in Pasch applies here. Notwithstanding the label attached by the Department (see, id. at 356), the Department's action on the claim for refund was not final provided other related issues with respect to the same period were still pending before the Department. Therefore, we conclude that BNRR's claim for refund is properly before the Commission.⁽⁸⁾

State Sovereign Immunity

The Department argues that the Commission may not consider objections to the assessment based on the 4-R Act because the Act violates Wisconsin's sovereign immunity guaranteed by the 11^th Amendment to the U. S. Constitution. The 11^th Amendment provides that the judicial power of the United States does not extend to suits against states by citizens of another state or citizens or subjects of foreign states. The U. S. Supreme Court has held that the 11^th Amendment reaffirmed that states, as sovereign entities within the federal system, retained certain attributes of sovereignty including immunity from suits to which they do not consent. See, Seminole Tribe of Florida v. Florida, 517 U.S. 44, 54, 116 S. Ct. 1114, 1122, 134 L. Ed. 2d 252 (1996). In general, the Supreme Court has held that states are immune from suits filed pursuant to federal law by private plaintiffs in state or federal court. See, e.g., Alden v. Maine, 527 U.S. 706, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999); Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed 842 (1890).

The Supreme Court has recognized some exceptions to state sovereign immunity. Most notably, for purposes of this case, is the authority of Congress to abrogate state immunity from private suits as part of Congress' authority to carry out the purposes of the 14^th Amendment of the U. S. Constitution. See, Seminole Tribe of Florida, 517 U.S. at 59, 116 S. Ct. at 1125; Fitzpatrick v. Bitzer, 427 U.S. 445, 456, 96 S.Ct. 2666, 2671, 49 L.Ed.2d 614 (1976). The issue is whether the statute that abrogates state sovereign immunity is appropriate legislation to enforce the equal protection clause of the 14^th Amendment. The U. S. Supreme Court has held that section 5 of the 14^th Amendment authorizes remedial action necessary to enforce the 14^th Amendment, but not substantive changes to the protections afforded by the 14th Amendment. On the one hand, Congress' power to enforce the 14^th Amendment includes the power to address violations of rights guaranteed by the 14^th Amendment by prohibiting a broader range of conduct, including conduct which is not itself forbidden by the Amendment. City of Boerne v. Flores, 521 U.S. 507, 518, 117 S.Ct. 2157, 2163, 138 L.Ed.2d 624 (1997). However, Congress does not have the power to make a substantive change in the rights protected by the 14^th Amendment. Id. at 519, 117 S.Ct. 2164. In trying to distinguish between remedial and substantive remedies, the Supreme Court has held that where the means adopted is congruous and proportional to the injury to be remedied or prevented, then the means is likely remedial. However, lacking such a connection, the legislation may be impermissively substantive. Id. at 519-20, 117 S.Ct. 2164.

In City of Boerne v. Flores, the Supreme Court determined that the Religious Freedom Restoration Act ("RFRA") was not a proper exercise of Congress' power under section 5 of the 14^th Amendment, even though the Court acknowledged that Congress had the authority to enforce the right to the free exercise of religion under section 5. Id. at 519, 117 S.Ct. at 2163. The Court based its conclusion on the limited evidence in the legislative record of religious persecution and on the sweeping and intrusive nature of restrictions imposed by RFRA. Id. at 530-33, 117 S.Ct. at 2169-70.

Using the same analysis, the U. S. Supreme Court determined in Kimel v. Florida Board of Regents, 528 U.S. 62, 120 S.Ct. 631, 145 L.Ed.2d 522 (2000), that Congress did not validly abrogate state sovereign immunity in enacting the Age Discrimination in Employment Act ("ADEA"). The Court determined that Congress had virtually no reason to believe that state governments were unconstitutionally discriminating against employees on the basis of age, and, thus, there was insufficient justification for the broad prophylactic remedy provided by the ADEA. Id. at 91, 120 S.Ct. at 649-50.

Again in Board of Trustees of the University of Alabama v. Garrett, 531 U.S. 356, 121 S.Ct. 955, 148 L.Ed.2d 866 (2001), the Court held that Congress did not validly abrogate state sovereign immunity in enacting the Americans with Disabilities Act ("ADA"). The Court determined that Congress had virtually no evidence that state governments were unconstitutionally discriminating against employees on the basis of disability, and, thus, there was insufficient justification for the accommodations required by ADA. Id. at 372-73, 120 S.Ct. at 966-67.

Unfortunately, the Commission does not have the benefit of a Supreme Court decision applying this analysis to section 11501. However, three federal circuit courts of appeals in four cases have considered whether section 11501 is a valid abrogation of state sovereign immunity and concluded that it is. Burlington Northern & Santa Fe Ry. Co. v. Burton, 270 F.3d 942, 947 (10^th Cir. 2001); Union Pacific RR Co. v. Utah, 198 F.3d 1201 (10^th Cir. 1999); Wheeling & Lake Erie Ry. Co. v. Public Utility Comm. of the Commonwealth of Pennsylvania, 141 F.3d 88, 94 (3^rd Cir. 1998); Oregon Short Line Rr. Co. v. Dep't of Revenue Oregon, 139 F.3d 1259, 1267 (9^th Cir. 1998).

The Department argues that the Commission should disregard the decisions in Union Pacific, Wheeling & Lake Erie, and Oregon Short Line because these decisions predated the Supreme Court's decisions in Kimel and Garrett, both cited above. The Department argues that Kimel and Garrett made the test more stringent, and that had these courts of appeals considered them subsequent to these two decisions, the results in Union Pacific, Wheeling & Lake Erie, and Oregon Short Line would have been different. The Department's argument fails on several accounts.

We do not read Kimel and Garrett asimposing a different or more stringent test than the Court's opinion in City of Boerne, a decision that predates each of the court of appeals decisions challenged by the Department. In City of Boerne, Kimel, and Garrett, the Court used the same analysis: (1) determine the extent of constitutional violations identified by Congress as a target of the legislation at issue (City of Boerne, 521 U.S. at 530-31, 117 S.Ct. at 2169-70; Kimel, 528 U.S. at 88-91, 120 S.Ct. at 648-50; Garrett, 531 U.S. at 368-72, 121 S.Ct. at 964-66), and (2) determine whether the rights and remedies created by Congress are congruent and proportional to these unconstitutional violations (City of Boerne, 521 U.S. at 532-34, 117 S.Ct. 2170-71; Kimel, 528 U.S. 86-89, 120 S.Ct. at 647-49; Garrett, 531 U.S. at 372-73, 121 S.Ct. at 966-67).

This is precisely the analysis that was undertaken in the courts of appeals decisions that the Department asks the Commission to disregard. For example, in Union Pacific, the Tenth Circuit Court of Appeals held (1) that the legislative history of the 4-R Act contained a substantial history of state discrimination in taxation against being overtaxed by as much as $50 million per year; (2) that Congress found that such discriminatory treatment appears to run afoul of both the rational basis test of the Equal Protection Clause and the Interstate Commerce Clause; and (3) that state-imposed procedural barriers prevent railroads from obtaining effective relief in state court. 198 F.3d at 1206-09. Both the Third Circuit Court of Appeals in Wheeling & Lake Erie and the Ninth Circuit Court of Appeals in Oregon Short Line made similar findings, although not with the same degree of detail as the Tenth Circuit Court of Appeals in Union Pacific. Wheeling & Lake Erie, 141 3d at 92-93; Oregon Short Line, 139 F.3d at 1266-67.

Similarly, each of these courts of appeals held that the remedies afforded by the 4-R Act were limited, congruent, and proportionate to the Equal Protection violations that the Act seeks to prevent. Union Pacific, 198 F.3d at 1208; Wheeling & Lake Erie, 141 F.3d at 93-94; Oregon Short Line, 139 F.3d at 1267.

We are not alone in concluding that the Supreme Court's decisions in Kimel and Garrett do not change the conclusion reached by these courts of appeals that section 11501 is a valid abrogation of state sovereign immunity. In Burlington Northern & Santa Fe, a decision issued nine months after Garrett and 22 months after Kimel, the Tenth Circuit again ruled that section 11501 was a valid abrogation of state sovereign immunity and concluded that Kimel and Garrett did not contradict Union Pacific. Burlington Northern & Santa Fe, 270 F.3d at 947. Based on this unanimity of opinion by the circuit courts of appeals and the inability of the Department to cite any contrary authority that is on point, we conclude that section 11501 is a valid abrogation of state sovereign immunity.

The 4-R Act

As seen above, the 4-R Act was enacted in response to Congress' finding of significant discriminatory state tax schemes against railroads. See, Burlington Northern RR Co. v. Oklahoma Tax Comm., 481 U.S. 454, 457, 107 S.Ct. 1855, 1857-58, 95 L.Ed.2d 404 (1987). Generally speaking, the 4-R Act prohibits "assessment ratios or taxation rates imposed on railroad property which differ significantly from the ratios or rates imposed on other commercial and industrial property." Id. at 457, 107 S.Ct. at 1858. A state scheme can fall victim to the 4-R Act even if the scheme does not specifically target railroad companies or railroad property. In Burlington Northern RR Co. v. City of Superior, 932 F. 2d 1185 (7^th Cir. 1987), the Seventh Circuit Court of Appeals struck down a municipal tax on iron ore docks enacted pursuant to section 70.40 of the 1989-90 Statutes. There are only three such docks in Wisconsin; all three were in the City of Superior, and all three were operated by BNRR. Id. at 1186. Even though it was quite possible that a company not protected by the 4-R Act could operate an iron ore dock, the Court of Appeals held that the 4-R Act prohibits a tax that, in effect, taxes the inputs of railroad companies alone. Id. at 1188.

BNRR has simply not demonstrated that Wisconsin's income/franchise tax imposes a greater burden on BNRR or companies protected by the 4-R Act than it imposes on other commercial or industrial entities or other transportation entities. In short, we do not find that Wisconsin's income/franchise tax treats BNRR or other companies protected by the 4-R Act less favorably than any other corporation that became subject to the income/franchise tax during the period under review.

Discriminatory Intent

BNRR first argues that the Department and the Legislature specifically targeted railroads for treatment that was less favorable than other multi-state corporations who became subject to the income/franchise tax. BNRR cites LRB- 0913/2--a Legislative Reference Bureau draft that was prepared in anticipation of the 1987-88 legislative session. Had it been introduced and enacted, LRB-0913/2 would have removed the income/franchise tax exemption for railroad corporations, sleeping car companies, and car line companies. LRB-0913/2 also addressed the initial basis of depreciable property of any corporation that ceases to be exempt as follows:

1. For property placed in service prior to January 1, 1983, the adjusted basis would be that computed under the IRC as of the beginning of the taxable year in which the corporation ceases to be exempt;
2. For property placed in service on or after January 1, 1983, and which is located out of state, the adjusted basis would be that computed under the IRC in effect on December 31, 1980, as of the beginning of the year in which the corporation ceases to be exempt;
3. For property placed in service on or after January 1, 1983, and which is located in Wisconsin, the adjusted basis would be that computed under the IRC.

The 1987-88 Legislature did not remove the income/franchise tax exemptions for railroad companies, sleeping car companies, and car line companies. However, the Legislature did enact section 71.265 of the Statutes which is similar, but not identical, to the first of the three initial basis provisions contained in LRB-0913/2 described above. Unlike the provisions contained in LRB-0913/2, section 71.265 provides one test for all depreciable property of a corporation that ceases to be exempt from the income/franchise tax: the initial basis is the basis computed under the IRC as of the beginning of the year in which the corporation ceases to be exempt.

LRB-0913/2 and the timing of the enactment of section 71.265 is a non-issue in two respects. First, as we conclude below, it does not appear that the treatment to be afforded to corporations that would no longer have been exempt under LRB- 0913/2, would have been substantially different than the treatment of corporations that would otherwise become subject to the income/franchise tax under existing corporate law. Second, and more important, intent is not an element or factor in determining whether a state tax scheme violates the 4-R Act. Burlington Northern RR Co. v. Oklahoma Tax Comm., 481 U.S. at 464, 107 S.Ct. at 1861; Burlington Northern RR Co. v. Bair, 815 F. Supp. 1223, 1227 (S.D. Iowa 1993).

Provisions Prior to 1991

The parties agree that the appropriate class to compare to BNRR is the class of taxpayers who were newcomers to the income/franchise tax beginning in 1991. This is in accord with the holding of at least one circuit court of appeals.⁽⁹⁾

See, Richmond, Fredericksburg & Potomac RR Co. v. Dep't of Taxation, Commonwealth of Virginia, 762 F.2d 375, 380 (4^th Cir. 1985).

BNRR devotes much of its argument to reciting depreciation benefits that were available to corporations subject to the income/franchise tax prior to 1991. To the extent that BNRR is arguing that BNRR is discriminated against because it does not have the benefit of these provisions, its argument is misplaced. As indicated above, the appropriate comparison does not include taxpayers who were subject to the income/franchise tax prior to 1991. Moreover, the 4-R Act does not entitle BNRR to favorable tax treatment that other corporations enjoyed prior to the removal of the income/franchise tax exemption in 1991. In Richmond, Fredericksburg & Potomac, the Court of Appeals held that railroad corporations, upon being subject to the Virginia corporate income tax in 1979, were not entitled under the 4-R Act to a favorable transition rule that previously applied (and had since expired) to all corporations when the Virginia corporation tax was federalized. 762 F.2d at 381.

Depreciation Methods

BNRR concentrates a great deal of effort discussing the various methods of depreciation available to taxpayers under the income/franchise tax, and it may be arguing that these methods are not available to BNRR. Again, much of its discussion applies to periods prior to 1991, which is not part of the comparison at issue. BNRR provides no admissible evidence that BNRR has fewer or less attractive depreciation options than other taxpayers who became subject to the income/franchise tax during and after 1991.

Scope of Section 71.265

BNRR argues that section 71.265 does not apply to taxpayers who first acquire situs in Wisconsin and, therefore, become subject to the income/franchise tax. This statute applies, in BNRR's view, only to taxpayers who become subject to the income/franchise tax presumably by virtue of an act of the Legislature removing its exemption. Were BNRR correct, then its lengthy discussion of pre-1991 provisions of Wisconsin law with respect to basis and depreciation methods would be relevant to the extent that these provisions might provide a more favorable initial basis for taxpayers who become subject to the income/franchise tax by virtue of acquiring situs in Wisconsin.

Up until 1988, section 71.04(15)(f) addressed the situation presented by a corporation that had depreciated property for federal income tax purposes prior to having income with a Wisconsin situs. This section provided that the initial basis of depreciable property of such a corporation for Wisconsin's income/franchise tax would be equal to the federally adjusted basis of its depreciable property as of the year the corporation first becomes subject to the income/franchise tax.⁽¹⁰⁾

Through a series of legislative enactments during the 1987-88 Legislature, this section was repealed, and in its place section 71.265 was created.⁽¹¹⁾

BNRR argues that section 71.265 does not apply to situations that were applicable under prior section 71.04(15)(f). That is, BNRR argues that section 71.265 does not apply to taxpayers that become subject to the income/franchise tax by virtue of first having income with a situs in Wisconsin. We disagree.

On its face, section 71.265 applies to more taxpayers than old section 71.04(15)(f). Clearly, section 71.265 applies to taxpayers like BNRR who cease to be exempt from the income/franchise tax by virtue of a change in the Statutes.

Section 71.265 also applies to a taxpayer that first becomes subject to the income/franchise tax by virtue of some activity or change in its organization. For example, a corporation qualifying for an exemption under section 401(c) of the IRC may engage in an activity that causes the taxpayer to lose its exempt status and then become subject to the income/franchise tax. Such a corporation would cease to be "exempt" from the income/franchise tax.

Similarly, a foreign corporation that previously lacked nexus with Wisconsin, then engaged in activity that created nexus, would come under section 71.265. For example, section 71.23(3) provides that a foreign corporation may engage in certain activities relating to the delivery, storage, processing, fabricating, and printing of tangible personal property in Wisconsin without creating nexus. A foreign corporation that engages in activities that exceed this safe harbor provision would cease to be "exempt" from the Wisconsin income/franchise tax and, therefore, come under the provisions of section 71.265.

Finally, section 71.23 (1) imposes the corporate income tax on corporations with property in Wisconsin that derive income from sources within Wisconsin or from activities that are attributable to Wisconsin. In tax parlance, we might refer to corporations that do not meet this test (or any other test for situs under the income/franchise tax) as "not being subject" to the income/franchise tax. Tax parlance often limits the term "exempt" to situations in which a taxpayer would be subject to a measure of tax but for a special provision of legislative grace that "exempts" the taxpayer from all or a portion of the tax. The ordinary meaning of "exempt" contains no such distinction. "Exempt" means to be freed from a duty or obligation required of others. Webster's II New College Dictionary 392 (2001). This definition does not make a distinction between an obligation that would be required but for a special provision of absolution and an obligation that is simply not imposed in the first instance. Thus, a corporation that acquires situs in Wisconsin "ceases to be exempt" from the income/franchise tax, as that term is used in section 71.265. Therefore, we conclude that the plain language of section 71.265 applies to any situation in which a corporation first becomes subject to Wisconsin's income/franchise tax.⁽¹²⁾

As a consequence, any corporation that became subject to the income/franchise tax after 1991, and during the period under review, was subject to the same provision with respect to its initial basis for Wisconsin's income/franchise tax.

Section 71.265 clearly applies to more situations than the old section 71.04(15)(f). This prior section applied only to corporations that begin operations in this state. It did not apply to corporations such as BNRR that had operations in Wisconsin but were still exempt and then subsequently lost this exemption. It is likely that, in the course of considering the repeal of the income/franchise tax exemption for railroad corporations, the Department realized section 71.04(15)(f) would not apply to railroad corporations. Thus, LRB-0913/2 included more extensive transition provisions than were provided by old section 71.04(15)(f). While the repeal of the railroad exemption may have been put off, someone realized the need to expand the transition provisions of old section 71.04(15)(f), and when the dust settled at the end of the 1987-88 Legislature, old section 71.04(15)(f) was out and section 71.265 had replaced it. While some of this legislative history may be conjecture, it is clear that section 71.265 was designed so that all corporations that cease to be exempt from the income/franchise tax are afforded the same treatment as had previously been provided to the more limited class of corporations subject to old section 71.04(15)(f).

BNRR disagrees with the Commission's conclusion that section 71.265 applies to corporations that acquire situs in Wisconsin. In fact, BNRR's position is essential to its argument that Wisconsin discriminates against BNRR. BNRR offers the affidavits of its Manager of Taxes, Ms. Suzanne Waldrep, and a retired employee of the Department, Mr. Kurt J. Kaspar, to show how the Department has discriminated against BNRR, especially in light of the Commission's decision in Beatrice Cheese, Inc. v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203-396 (WTAC 1993). Both of these affidavits are premised on the assumption that section 71.265 does not apply to corporations that obtain situs in Wisconsin.⁽¹³⁾

In fact, Ms. Waldrep offers her opinion that section 71.265 does not apply to corporations that obtain situs in Wisconsin. An affidavit that offers an opinion of law does not create a genuine issue of material fact, and we are not obliged to accept it, even for purposes of summary judgment, the opinion. Ruchti v. Monroe, 83 Wis. 2d 551, 558 (1977). In fact, we have already concluded the opposite.

In Beatrice Cheese, the Commission concluded that section 71.04(15)(b) of the Statutes from 1983 to 1986 and section 71.26(3)(y) of the 1987-88 Statutes violated the Interstate Commerce Clause of the U. S. Constitution. These provisions provided less favorable depreciation rules for property placed in service outside of Wisconsin after 1982. BNRR points out that, following Beatrice Cheese, the Department in 1993 allowed corporations that had been subject to this unconstitutional provision to obtain relief, provided that the statute of limitations had not run. These facts do not show any discrimination against BNRR. For corporations that were subject to the income/franchise tax prior to 1991, it matters not how they were treated because they are not in the comparison at issue. All corporations that became subject to Wisconsin's income/franchise tax beginning in 1991, including BNRR, had as their beginning basis for Wisconsin's income/franchise tax their federal basis, and if they were adversely affected by the statutes struck down by the Commission in 1993, they were entitled to the same relief. Where is the discrimination?

BNRR also spends considerable effort on TAX 2.74 of the Wisconsin Administrative Code and other releases and bulletins issued by the Department. In the case of TAX 2.74, the rule was repealed in 1990, prior to the date applicable for comparison in this case. Even though the rule was in place subsequent to the enactment of section 71.265, it clearly did not apply to 1988, 1989, and 1990. The Department argues that this rule applied to years prior to federalization of Wisconsin income/franchise tax in 1972. BNRR finds it incredulous that the rule would remain "on the books" until 1990. Provisions of Wisconsin tax law often remain on the books for years after they are no longer effective because these years may remain open for audit purposes, presumably because the Department does not want anyone to interpret the repeal of an outdated rule as having an ex post facto effect. For example, the current Wisconsin Statutes contain a provision that explicitly applies only to taxable years beginning in 1992. Wis. Stat. § 71.22(4)(g) (1999-2000).

Similarly, the tax releases and bulletins cited generally applied to years prior to the enactment of section 71.265. In any case, none of these publications alter the initial basis for corporations that first became subject to Wisconsin's income/franchise tax in 1991 and thereafter.

The Commission will issue a notice setting a time and date for a status conference to consider scheduling matters relative to the disposition of the remaining issues.

ORDER

1. BNRR's motion for partial summary judgment is denied.

2. The Department's motion for partial summary judgment is granted.

3. BNRR's claim for refund with respect to its initial basis for Wisconsin's income/franchise tax is denied.

4. The Department's action on the petition for redetermination with respect to BNRR's initial basis for Wisconsin's income/franchise tax is affirmed.

Dated at Madison, Wisconsin this 22nd day of August, 2002.

WISCONSIN TAX APPEALS COMMISSION

Don M. Millis, Commission Chairperson

Thomas M. Boykoff, Commissioner

Richard F. Raemisch, Commissioner

pc: Attorney Gregory G. Fletcher

Attorney Donald J. Goldsworthy

¹ BNRR is not a public utility under section 71.04(15)(bm) of the 1985-86 Statutes, but is classified as a public utility for income apportionment purposes, (see Wis. Stat. § 71.25(10)(b) (1991-92)), and is classified as a public utility for ad valorem tax purposes (see Wis. Stat. § 76.01 (1985-86)).

² Depreciable assets consisting of waste treatment facilities, pollution abatement plants and equipment, and renewable energy resource systems were excepted from this change.

³ Other elements of the Department's action on BNRR's petition for redetermination are not before the Commission on these motions and will be resolved in future proceedings.

⁴ The Department also argues that BNRR should not prevail on its claims for refund because it failed to first seek the Department's permission to alter its method of accounting pursuant to TAX 2.16 of the Wisconsin Administrative Code. Because we find for the Department on other grounds, we need not address this issue.

⁵ This conclusion applies only to the depreciation issue raised in the claim for refund. Because the other issues raised in the petition for review are not before the Commission on summary judgment, the Commission makes no judgment as to whether the other issues raised in the 1991 amended return, if any, were the subject of the assessment.

⁶ One may wonder why the Department would issue a notice denying the claim for refund while at the same time acknowledging that the appeal of same will be considered during the appeal of the petition for redetermination. The record contains no indication of the Department's motive, and any suggestion is speculation. It may be, however, that those in the Department wanted to avoid the possibility that failure to issue a denial within one year of its filing would mandate granting the refund pursuant to section 71.75(7) of the Statutes. As it turns out, the Department did not act on the petition for redetermination until June 24, 1998, nearly two years after the petition for redetermination and the refund claims were filed.

⁷ These issues include: (1) whether BNRR could depreciate assets as a public utility, (2) whether gross receipts from carriage should be included in calculating BNRR's apportionment factor, and (3) whether BNRR's gross income should include imputed interest on loans by BNRR among its subsidiaries and affiliates.

⁸ BNRR argues in the alternative that if the Commission determined that it did not timely file a petition for redetermination with respect to its claim for refund, then it is still entitled to relief under the doctrines of equitable estoppel and equitable recoupment. Because the Commission concludes that BNRR filed a timely petition for redetermination with respect to its claim for refund, we need not address these alternative theories.

⁹ BNRR's Initial Brief at 19; Department's Initial Brief at 14.

¹⁰ This section also contained a special provision for public utilities that is not material here.

¹¹ Three acts were passed by the Legislature and enacted during a span of 70 days in 1988. 1987 Wisconsin Act 312, which was intended to make non-substantive revisions to various tax statutes, rewrote Chapter 71 without including the provisions contained in former section 71.04(15)(f). The Legislature gave final passage to the bill that became Act 312 on March 23, 1988, and it was signed into law on April 20, 1988. 1987 Wisconsin Act 399, the 1988 annual budget bill, codified the language now found in section 71.265 as section 71.04 of the Statutes. The Legislature gave final passage to the bill that became Act 399 on April 20, 1988, and it was signed into law on May 13, 1988. 1987 Wisconsin Act 411 resolved a numbering conflict between Acts 312 and 399 by renumbering section 71.04 (as created by Act 399 ) to section 71.265. Both houses of the Legislature passed the bill that became Act 411 on May 19, 1988, and it was signed into law on June 1, 1988.

¹² The Department argues that interpreting section 71.265 to not apply to corporations that become subject to the income/franchise tax by acquiring Wisconsin situs would lead to an absurd result because Wisconsin would then have no provision for the initial basis of such corporations. While we agree with application of this rule of statutory construction, we need not rely upon it because we find section 71.265 clear and unambiguous.

¹³ In fact, Mr. Kaspar asserts that corporations coming into Wisconsin for the first time from 1991 until the Beatrice Cheese decision would have its out-of-state property recalculated. If this were the case, it would clearly be in violation of section 71.265. It does not appear that Mr. Kaspar came to this opinion based on empirical observation of the Department's treatment of taxpayers new to Wisconsin's income/franchise tax. Rather, he bases his opinion on publications issued by the Department prior to the enactment of section 71.265.

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