Wisconsin Tax Appeals Commission Docket No. 98-I-211p

STATE OF WISCONSIN

TAX APPEALS COMMISSION

BURLINGTON NORTHERN RAILROAD COMPANY (P),

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

DOCKET NO. 98-I-211(P)

RULING AND ORDER
ON PETITIONER'S MOTION
FOR RECONSIDERATION

DON M. MILLIS, COMMISSION CHAIRPERSON:

This matter comes before the Commission on petitioner's motion for reconsideration⁽¹⁾ of the Commission's Ruling and Order on Motions for Partial Summary Judgment dated August 22, 2002 ("Commission's Order"). Both parties have submitted briefs on the motion for reconsideration. Petitioner is represented by Baker, Donelson, Bearman & Caldwell, P.C., by Attorney Gregory G. Fletcher. Respondent is represented by Attorney Donald J. Goldsworthy.

Based on the submissions of the parties and the entire record in this matter, the Commission hereby finds, rules, and orders as follows:

This matter arises out of an audit of petitioner by respondent in which respondent assessed additional income and franchise taxes against petitioner for the period from January 1, 1991, through December 31, 1994 ("period under review"). The assessment included three types of adjustments: (1) adjustments to the starting basis of petitioner's property for Wisconsin's income and franchise tax, (2) adjustments to petitioner's gross receipts in carriage, and (3) adjustments to imputed interest and advances by petitioner among its subsidiaries and affiliates. (Petitioner subsequently filed a claim for refund with respect to some of the issues raised in the audit.) The parties have agreed to resolve the issues involved in the adjustments to the starting basis in petitioner's property prior to moving on to the second and third issues.

Each party filed a motion for summary judgment with respect to the starting basis of petitioner's property. Petitioner argued that Wisconsin's law governing the starting basis of property (i.e., the basis when an existing taxpayer first becomes subject to Wisconsin's income and franchise tax) violates the Railroad Revitalization and Regulatory Reform Act ("4-R Act") because it discriminates against railroads. Petitioner specifically claimed that Wisconsin law afforded other corporations a more favorable starting basis than it afforded railroad corporations who became subject to the Wisconsin income and franchise tax in 1991.

In addition to arguing that Wisconsin's law governing starting basis did not violate the 4-R Act, respondent also argued: (1) that petitioner's claim for refund for 1991 was untimely, (2) that petitioner failed to file timely petitions for redetermination with respect to its refund claims for each of the years at issue, and (3) that the 4-R Act violates state sovereign immunity guaranteed by the 11^th Amendment to the U. S. Constitution.

In the Commission's Order, the Commission agreed with petitioner, in part, holding that the Commission did have jurisdiction over the claims for refund and that the 4-R Act does not violate state sovereign immunity. However, the Commission agreed with respondent that Wisconsin's law governing starting basis did not run afoul of the 4-R Act. The Commission, therefore, granted respondent's motion for summary judgment and affirmed respondent' action on the petition for redetermination with respect to the starting basis in petitioner's property for the years at issue. The Commission concluded that since its enactment in 1988, section 71.265 of the Wisconsin Statutes has provided that when a corporation becomes subject to Wisconsin's income and franchise tax, the initial basis of its property is the same as its federal adjusted basis as of the beginning of the year in which it becomes subject to Wisconsin's income and franchise tax. This conclusion and, in fact, the entire exchange between the parties was focused on the provisions of Wisconsin tax law, both statutes and administrative rules. That is, the context of the issue as framed by the parties was one of de jure discrimination.

The basis of the motion for reconsideration is that, notwithstanding the status of the law, there has been de facto discrimination. Petitioner argues that regardless of what the law says, respondent has, during the period under review, permitted corporations who first became subject to Wisconsin's income and franchise tax to use a starting basis for their property other than that mandated by section 71.265. If this is true, then petitioner may be able to prove that respondent is engaging in de facto discrimination, in violation of the 4-R Act. See, Louisville & Nashville RR Co. v. Dep't of Revenue, 736 F.2d 1495, 1498 (11^th Cir. Ct. App. 1984); Burlington Northern RR Co. v. Lennen, 715 F.2d 494, 497 (10^th Cir. Ct. App. 1983).

Petitioner points to the Affidavit of Kurt Kaspar that it offered in support of its motion for summary judgment to show that respondent engaged in de facto discrimination. We do not read anything in the Kaspar affidavit that would lead to the inference that respondent engaged in de facto discrimination. The Kaspar affidavit is an explanation of the law as viewed by Mr. Kaspar, who during the first 30 months of the audit period was director of respondent's field audit section. A paragraph-by-paragraph review of the Kaspar affidavit bears this out:

Paragraphs 1 through 3 explain Mr. Kaspar's background, work experience, and the reason for submitting the affidavit;
Paragraphs 4 through 6 recount legal developments prior to the period under review;
Paragraph 7 describes respondent's procedure for starting basis during the period from December 31, 1982 through February of 1993, but does not describe any discriminatory treatment against railroad companies or petitioner;
Paragraph 8 refers to other documents supporting paragraphs 6 and 7;
Paragraph 9 describes a draft of potential legislation and Mr. Kaspar's activities with regard to this draft;
Paragraphs 10 and 11 appear to describe the differing impact on corporations based on the impact of the Commission's decision in Beatrice Cheese, Inc. v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 203-396 (WTAC 1993).

Petitioner points to paragraphs 10 and 11 as evidence that it offered to show de facto discrimination between railroad corporations and other corporations. The Commission reviewed these paragraphs in preparation of the Commission's Order and concluded that these paragraphs could only be construed to refer to the state of the law. See, Commission's Order, Slip Op. at 46, n.13. In fact, petitioner's brief discussing these paragraphs concentrated on the effect of Wisconsin's law and did not employ the term "de facto." See, Petitioner's Brief (dated Sept. 12, 2001) at 21-22. After consideration of petitioner's argument, the Commission rejected it, holding that there was no discrimination as a matter of law. See, Commission's Order, Slip Op. at 46-47. In retrospect, we cannot agree that Mr. Kaspar is describing anything other than the state of the law as he saw it.

However, even though petitioner did not raise the issue of de facto discrimination in its motion for summary judgment, the question remains as to whether the Commission should nevertheless permit petitioner to try to prove such discrimination. This determination rests with the sound discretion of the Commission.

The Commission's Order was not the final order in this matter. There remain substantial issues to resolve. Even if petitioner were not able to raise the issue of de facto discrimination, this might be raised by another railroad corporation in the future. Therefore, the Commission, in its discretion, will afford petitioner an opportunity to prove that respondent engaged in de facto discrimination against petitioner with respect to the starting basis of property owned by corporations that first became subject to the Wisconsin income and franchise tax beginning in 1991.⁽²⁾ Failure to prove such discrimination will result in the reinstatement of the Commission's Order affirming respondent's action on the petition for redetermination with respect to petitioner's initial basis.

ORDER

Petitioner's motion for reconsideration is granted, and Orders 2, 3, and 4 on page 48 of the Commission's Order are vacated, pending further order of the Commission.

Dated at Madison, Wisconsin, this 13th day of January, 2003.

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 Petitioner filed a document captioned "Petition for Rehearing" on September 10, 2002, presumably pursuant to section 227.49 of the Wisconsin Statutes. By its Order dated September 11, 2002, the Commission construed this filing as a motion for reconsideration.

² The Commission reserves its determination as to the threshold for proving such discrimination .