CSX Transportation, Inc. v. Georgia State Board of Equalization - Oral Argument

Argument of Carter G. Phillips

Chief Justice Roberts: We'll hear argument first this morning in Case 06-1287, CSX Transportation v. the Georgia State Board of Equalization.

Mr. Phillips.

Mr. Phillips: : Thank you, Mr. Chief Justice, and may it please the Court: Congress in what is now Section 11501(b)(1) crafted what this Court described as a straightforward approach to determining whether a State is unlawfully taxing railroad property.

Congress used a precise formula that is set out in a pictorial form on page 6 of the Petitioner's brief, and I think it's probably easier to kind of follow along on that.

What basically Congress said is that the court in making a determination as to whether there's an illegal tax considers the assessed value of rail transportation property as the numerator on the left side of the fraction, compares that to the true market value of rail transportation property, and then compares that ratio to the ratio created by examining the assessed value of other commercial and industrial property over the true market value.

Fortunately, in this particular case three out of four of those variables are agreed to by the parties, so the only issue in this case is what constitutes the true market value of the rail transportation property within the meaning of that statute.

This Court in Burlington Northern first evaluated the language of this statute and held, in what I think the Court later would describe as a straightforward fashion, that 10501(b)(1) declares that the district court... for the district court, that it is necessary for that court to determine what the true market values of the respective properties are.

Justice Alito: Is it realistic to think that you can calculate with any degree of precision what the true market value of CSX's property is?

The range of values that were calculated by both of these experts are really astonishing, from 12.3 billion to 8.1 billion for Dickerson, from 9.3 to 5.9 for Tegarden.

It's like $3 billion or $4 billion doesn't mean anything.

What is the... can this be done with any precision or is it more realistic just to say that what the district court would have to do is to figure out whether the State's calculation is within some reasonable range?

Mr. Phillips: No, I think it's pretty clear that Congress did not adopt that particular formulation.

What Congress tasked the district court with doing was determining the true market value.

And if you look at footnote 8 of the district court's opinion, I think he does a fairly interesting job of explaining what that would normally mean.

He says: In an ordinary valuation case I would take in all of the expert testimony from the railroad, I would take in all of the expert testimony of the State, I would evaluate them and I would come up with a conclusion as to what I think is the true market value.

Chief Justice Roberts: And do you want the district court to in addition determine which methodology most accurately reflects that true market value?

Mr. Phillips: No, I don't--

Chief Justice Roberts: You want to be able to challenge the state's chosen methodology for determining market value?

Mr. Phillips: --Yes.

I think every facet of the question of, that goes into the determination of what is a true market value.

Chief Justice Roberts: So if the, so if the district court says this methodology, Methodology A, most accurately yields true market value, that is giving rise to a Federal rule of determining value, isn't it?

Mr. Phillips: No.

I think all it says is that in this particular case under these particular circumstances that methodology led to what was the true market value.

Chief Justice Roberts: Well, I don't see how it varies based on the particular circumstances.

If he says I think, you know, whatever it is, discounted value approach is the best way for determining market value, he's not going to in the next case or the district court isn't going to be able to say, I think reproduction cost is the best method.

You're going to establish a Federal rule for what is the best way of determining market value.

Mr. Phillips: Mr. Chief Justice, I think that's not accurate.

I think what will happen is that the circumstances change every day.

Let's just take a pretty simple example.

Let's assume that in year 1 the district court decides to use discounted cash flow.

In year 2 it turns out that CSX or some other railroad property is sold, so that you have an actual direct sales comparison data available to you by which to make the market value.

Chief Justice Roberts: That happens, that happens once every 25 years.

If you prevail on a method that you think is more favorable to railroads before a particular district court, you're going to cite that district court in the next case that you've got and you say: Look a district court's already looked at this and they said Method A is a better way of determining market value.

Mr. Phillips: Right.

I'm sure that's true that we'll cite it, but the reality is that the district court in the second case is not bound by the decision of the district court in the first case.

And the truth is every single one of these--

Chief Justice Roberts: So if a district court says in one case Method A is the best way to get market value and another district court says Method B and they both appeal, the court of appeals is going to have to resolve that conflict, isn't it?

Mr. Phillips: --Well, at the end of the day the district court's going to make a valuation.

It's going to say that this is the true market value.

That determination is a question of fact and therefore, yes, the court of appeals will evaluate that to determine whether or not that fact is clearly erroneous.

Justice Alito: I think you said that CSX has properties in 15 States that use the unit method of calculation.

Mr. Phillips: I believe that's correct.

Justice Alito: So if you challenge all of those there could be 15 different district court findings on true market value, and so within each circuit the court of appeals would have to decide which district court was correct as a matter of fact?

Mr. Phillips: Sure, Justice Alito, that's exactly what could happen.

But the reality is is that that's exactly what's been going on since the statute was enacted in 1976.

48 of the 50 States have railroads that have to be evaluated and, as the AAR's amicus brief points out, there have been 12 cases on this particular issue.

It is not as though it is cost-free for the railroads to challenge what the States are doing under these circumstances.

There is no cost shifting or fee shifting arrangement.

And second, you're suing the very person who's going to be making the decision next year as to the value of your property.

Chief Justice Roberts: Well, but it's already been pointed out if the range is a variable of $4 billion I think it probably is worth their while to challenge what they think is a low valuation.

Mr. Phillips: Yes.

Well, blissfully, more often than not it turns out that the overvaluation are not nearly that stark.

But I think that goes to the core point here, which is that if this Court concludes like the Eleventh Circuit did, which is that there is no basis for challenging the methodology, then it would have been completely within the province of the State of Georgia to say, we're going to adopt a stock and debt method, which virtually everybody recognizes is not an accurate way to determine true market value, that that number would have been $12.2 billion.

Chief Justice Roberts: What if we were to adopt a different approach which said that you can challenge the methodology, methodology, when different methodologies are used, but if the State is using the same methodology that's their choice?

It seems to me the only other alternative is to have the Federal judiciary develop a Federal rule about what methodology has to be used.

Mr. Phillips: Well, I don't think there's ever a reason why the Federal court has to adopt a single methodology and I don't think that's what Congress intended.

I think what Congress intended is what happens in every run of the mine valuation case that comes up in either State or Federal court, which is that each side presents its best guess as to what the true market value is and the district court resolves those differences and comes out with a number that the district court believes constitutes the true market value.

Justice Scalia: I suppose there are a lot of valuation cases under the Takings Clause, aren't there?

Mr. Phillips: Yes, Justice Scalia, there are.

Justice Scalia: Is there a standard Federal rule for how you evaluate--

Mr. Phillips: If you read footnote 8 of the district court's opinion, the district judge says, if this were a typical valuation case what I would have done is I would have listened to the railroad, I would have listened to the State and I would have made a judgment as to what I think is the right--

Chief Justice Roberts: Isn't that how it works in utility rate regulation?

Isn't there in fact a standard Federal method of determining what rates affect the taking of property--

Mr. Phillips: --But that's because there's usually... which rates affect the taking of property?

Chief Justice Roberts: --Yes, if it's challenged--

Mr. Phillips: Or what the rates ought to be?

Chief Justice Roberts: --The rate of return in a public utility.

Mr. Phillips: But that's because that's regulated by a Federal agency that formulates a very precise approach typically.

But there's nothing like that... and that approach governs every utility subject to the jurisdiction of FERC.

Justice Kennedy: I was going to ask this question.

Is it... would it be permitted for a State to say that, with respect to utilities and certain industries, including railroads, we use valuation Method A, with respect to commercial rental real estate property we use valuation Method B?

Is that permitted?

Mr. Phillips: It's permitted for them to use different methodologies because typically they do.

The reality is they almost never use the same methodology for determining railroad property as they do for other commercial and industrial property because the data that are available for the two are never the same.

Justice Kennedy: So is a large part of the argument you would make that other utilities are comparable or not comparable to a railroad?

Mr. Phillips: You would make that argument, but you'd also make an argument as to sort of what data are available in any particular case to allow a particular methodology to be used.

Justice Kennedy: Suppose an accounting journal or some prestigious group of accountants and tax appraisers came up with a new theory for evaluating railroad property and it was conceded by all to be highly accurate.

Could they use just that for the railroad and different methodologies for all other utilities all over the country?

Mr. Phillips: At the end of the day the test here is purely a results-driven test.

It doesn't tell the State what methodologies to use on either side of the equation.

What it says is at the end of the process you end up with a ratio between assessed and true market value for each that's within 5 percent.

Justice Scalia: Mr. Phillips--

Justice Kennedy: So that if had the Platonic, the ideal valuation method, the State could use it only if it ended up with the right ratio?

Mr. Phillips: --Well, the State can use any... the State can assess any way it wants to in defense of its ultimate outcome.

Justice Kennedy: But in the end it has to have the right ratio.

Mr. Phillips: At the outcome it has to have the right ratio.

That's clearly what Congress intended.

I mean, this language could not be more straightforward.

Justice Kennedy: Well, Congress uses the word "true market value" and under this hypothetical I come very close to true market value, and you say it doesn't work.

Mr. Phillips: Well, my guess is that the district judge in that situation would probably say that that is the true market value.

The problem is when you deviate from that methodology when you're evaluating commercial and industrial property what happens in that context?

Does that end up with a true market value that's much higher or lower.

Justice Kennedy: I thought your... I thought your submission was that even if is true market value for the railroad, the ratio still has to be in line if the methodology is different.

Mr. Phillips: Right.

Well, at the end of the day that's right.

The question here is the comparison of assessed to true market value on both sides of the equation.

It doesn't dictate the methodology for get ting there in either situation.

Justice Scalia: --Mr. Phillips, could I come back to this question of whether or not there's going to be a uniform Federal rule or not.

When the district court makes this finding of what the true market value is that's a finding of fact, I assume.

Mr. Phillips: I believe that is, yes.

Justice Scalia: And it would be reviewed under a clearly erroneous standard by the court of appeals?

Mr. Phillips: Yes, Justice Scalia.

Justice Scalia: And if there were various methodologies that were possible and this was one of the ones that was ballpark at least reasonable, would the court of appeals have any basis for reversing the, how could you say it's--

Mr. Phillips: More often than not, my answer would be no, there wouldn't be any basis.

Chief Justice Roberts: Well, more often than not.

But in fact it is an ultimate finding of fact, but it's based on valuation methodology and that's what's at issue here.

No one doubts that the application of a methodology can be challenged.

The question is whether or not if you start out... I reached these facts because I used reproduction costs as my method of valuation, and your submission is going to be that vastly overvalues our property and you should use a different method.

That's a legal question.

That's not a method... question of fact.

Mr. Phillips: But the protection that we're seeking, Justice, to answer Justice Scalia's question, is to have the independent de novo assessment by the district court.

I mean, that's the real purpose of the statute, is to provide a Federal forum.

Chief Justice Roberts: What if the district court... what if there is one methodology that gets you an answer within 20 percent margin of error, up or down, and there is another methodology that gives you an answer with a 5 percent margin of error, up or down?

Can you challenge the application of one of those as opposed to the other.

Mr. Phillips: Well, it depends on what you're asking me.

Are you talking about how the district court, or the court of appeals?

If it's in the district court--

Chief Justice Roberts: Well, of course you can challenge it.

Mr. Phillips: --because the question for the district court is not with deference to how the State is evaluating this issue.

The question is for the district court, de novo, to make a determination of what the true market value is.

But asking on the court of appeals side, that's a different question.

Chief Justice Roberts: My question... my question assumes that the methodology leads to a value that is either 20 percent higher or lower in one case, and 5 percent higher or lower in the other case.

Mr. Phillips: As I understand the way this statute applies, this is not a statute that worries about sort of how you get to the numbers.

All this statute worries about is when you get to a number at the end of the day, is it within 5 percent of the same number that you... the same ratio you would have gotten using whatever methodology you use on a commercial and industrial side.

If the answer to that is it's more than 5 percent, then we are entitled to injunctive relief; and if it's not, then we are not entitled to injunctive relief.

And that's why I think it doesn't make sense to think about this in the context of... because you know, there's deference to the way the State analyzes--

Justice Souter: May I approach the same issue this way?

When a State board in this case determines what method of valuation it is going to use, what does it consider?

What are the reasons that it chooses method A rather than method B?

Mr. Phillips: --Well, in some ways it's difficult to know.

In this particular case--

Justice Souter: Well, what should the reasons be?

Mr. Phillips: --Well, I think they should be applying the professional standards of appraisal.

Justice Souter: Well, but the professional standards, I take it, are not simply rules that one can grab out of thin air depending on one's mood.

Doesn't--

Mr. Phillips: Trust me, having read them, you can't grab them out of thin air.

Justice Souter: --Doesn't one have to choose the methodology based on some factual determination on... which would support a conclusion that this is a better methodology for this case and others--

Mr. Phillips: To be sure.

Justice Souter: --for this case than others?

Mr. Phillips: And Justice Souter, that's driven largely by what data are available and what do we know about how these methods have been applied in the past to value this particular property.

Justice Souter: But at the end of the day, it's a determination which is based upon facts.

There are good reasons in fact to choose method A rather than method B, right?

Mr. Phillips: There is also an element of judgment.

Justice Souter: Would it make sense then for a reviewing court to review the basis upon which the methodology was chosen, and if in fact there is a reasonable basis for choosing methodology A rather than methodology B, accept it and defer it to that extent?

Mr. Phillips: In a different world, that would make perfect sense.

That's an approach Congress clearly could have embraced.

The problem is Congress didn't do that.

Congress said choose the true market value.

Justice Scalia: --I'm not sure what his question is.

I think he is talking about reviewing the district court's judgment on that basis.

Justice Souter: I'm talking about reviewing the judgment of the State authority in choosing one method rather than another.

Mr. Phillips: Right.

And the answer to that is that Congress didn't intend to set this up as a review process of what the State does.

Congress intended for the district court to do what this Court said in Burlington Northern, make the necessary determination of the true market value of that property.

Justice Souter: But we don't... we don't know, there is no way of telling whether there is a variation, or there isn't a variation under the congressional formula, unless we first have a formula for determining what the value... what the true value of the railroad property is.

We know that can vary.

That can vary depending upon the methodology chosen.

The methodology chosen is dependent upon good facts, to pick one or the other; and therefore, doesn't the very... the very criterion that Congress chose ultimately depend upon the methodology?

Mr. Phillips: No, I don't think so.

I think what the Court said is that... or what Congress has said is that the district court can take all of that into account; but at the end of the day, it is the district court serving as a check on what the State does that decides what the true market value.

I'd like to reserve the balance of my time, Your Honor.

Argument of Douglas Hallward-Driemeier

Chief Justice Roberts: Thank you, Mr. Phillips.

Mr. Hallward-Driemeier.

Mr. Hallward-Driemeier: Mr. Chief Justice, and may it please the court: Congress did not, in the 4-R Act, establish a right to obtain in Federal court administrative review of State valuations.

Rather, it established a Federal right against State discrimination in which the railroad could bring a de novo suit in Federal court to vindicate that right.

Justice Alito pointed out the wide range of value that could be generated by generally accepted methodologies... 6 billion to 12.4 billion, in this case.

Clearly, if one were to accept the State's rule that any reasonable methodology, by which they mean any methodology that is reasonable in the abstract that may have been approved by this Court in the 1800's, a State could hide any variety of discriminations within that rubric.

There would be very little, if any meat to Federal court review under the 4-R Act.

Justice Souter: What if you take my variation on it, and that is, we don't defer it to the State's choice in the abstract, i.e. if we... if there are 10 methods, as long as it's one of the 10 it's okay?

Rather, if we defer at all, we defer it to the choice that is made to... to accept one or the other methodology, and we look to the reasons that the State gives for making that choice?

Would that take all the teeth out of the Federal act?

Mr. Hallward-Driemeier: Well, I think that it would, to a large extent, undermine the right and protection that Congress intended.

And partly, I think that the... Your Honor's question is based on a faulty premise, and that is that the State uses a single methodology in carrying out its valuation.

Justice Souter: Your point is well taken.

It has a variety, and then it makes some kind of a judgmental choice as between the results it gets.

But that I guess just makes my question more complicated.

As long as it... as long as it has good reasons for selecting, let's say the three competing methodologies that it uses, and as long as it has a rational... gives a rational basis for the ultimate resolution, should we not or should a court not defer to the choices?

Mr. Hallward-Driemeier: Well, I think that to call the weighing of the three evidences of value that might be generated by cost income, sales methods, a choice of methodology to which the Federal court is required to defer is a misnomer, because it really is an exercise of judgment with respect to the facts of the case and the reliability of the data available.

Justice Souter: But doesn't the judgment get exercised in determining what facts are good reasons for selecting this methodology, or this variant of methodology, for this particular case?

Mr. Hallward-Driemeier: I think Your Honor is correct, that the... because you're pointing out that really, the choice among methodologies is more a question of what are the facts on the ground, what is the reliable, available data that could be used in generating these different evidences of value.

And the court's role, in our view, is to consider all of the evidences of value, not just the State's evidence.

That would be the proper approach in a suit for administrative review... of administrative determination by the State, but is a de novo proceeding in which the court is to consider all evidence of value to determine, to its own satisfaction, what the true market value of the railroad is.

Justice Scalia: Even if you don't agree with Justice Souter's test for the district court review of the State, might you agree with it as applied to the court of appeals review of the district court's job?

Mr. Hallward-Driemeier: I do believe that the court of appeals review is reviewing a determination of fact by the district court.

There may be subsidiary questions of the law that the court of appeals would review.

For example--

Justice Scalia: Well, are you going to answer my question, yes or no?

Mr. Hallward-Driemeier: --I do believe... yes, that the review of the appellate court of the district court's finding is different than the review of the district court's review of--

Justice Scalia: I didn't ask whether it was different.

I asked whether a reasonable basis for plain error... for clearly erroneous review, by the court of appeals, begins with assessing whether the methodology used by the district court is reasonable.

Mr. Hallward-Driemeier: --Well, again, I don't think that it's fair to assume that the district court would have used a single methodology.

Rather--

Justice Scalia: Well, a combination of methodologies.

I'm talking about... when I say methodology, I mean even if it uses a combination of five different ones, okay.

Mr. Hallward-Driemeier: --Well, I--

Justice Scalia: Is it reasonable?

How do you propose to have the court of appeals review the district court's selection of methodologies?

Mr. Hallward-Driemeier: --Well, it would be, as Justice Souter suggested, a question of whether those methodologies... whether the evidence in the case indicated that those methodologies were reliable indications of value.

Justice Scalia: --were reasonable?

Do they have to have been the very best?

Mr. Hallward-Driemeier: It would have to be reasonable for the court to have relied on them--

Justice Scalia: Is it clearly erroneous if it may not be the very best, but it's ballpark and there is disagreement as to what the very best would be?

Mr. Hallward-Driemeier: --I do believe that's true, and that is in the nature of the appellate court's review of the factual finding by the district court.

Justice Stevens: May I ask this question?

I understood you to be arguing that the district court made an error of law in not receiving evidence of a different methodology offered by the railroads.

And also, if they conceivably... if I understood you correctly, you could send the case back, they could then receive the evidence and come to precisely the same conclusion that they already came to.

That would be permissible, wouldn't it?

Mr. Hallward-Driemeier: It would be permissible.

You're absolutely right, Justice Stephens.

Justice Ginsburg: There's something not quite right about that.

Wasn't all the evidence submitted, but the district judge said, I have all the evidence, but I can't consider.

It isn't a question of introducing new evidence when it goes back.

It's a question of looking at the body of evidence that was submitted.

Mr. Hallward-Driemeier: That's right.

It's not a question of whether it was excluded, in the sense that Tegarden wasn't allowed to testify.

It was excluded by the court in its consideration.

Chief Justice Roberts: Were all of the values that were arrived at in this case within the ballpark?

Mr. Hallward-Driemeier: Well, I... whether they are in the ballpark is not the test.

Whether they are indications... reliable indications of true market value.

True market value is a fact that, as the Court recognized in Burlington Northern, must be determined by the Federal court.

Chief Justice Roberts: Were all the valuations used here reliable indications of true market value?

Mr. Hallward-Driemeier: Well, they were... Respondent argues that they were all reasonable methodologies.

But no, I don't think that it's true that the true market value of the railroad is either 6 billion or 12 billion.

The determination the Federal court has to decide is what is the true market value.

Chief Justice Roberts: Well, there is no way to tell.

Everybody agrees we're just making more or less educated guesses.

Mr. Hallward-Driemeier: I don't think that that--

Chief Justice Roberts: And so the district court has to engage in purely fictional enterprise, and say yes, all the methodologies give you a range of 6 to 12 billion, but I think the answer is 8.2 billion.

Mr. Hallward-Driemeier: --Well, Your Honor, I do believe that there are bases upon which one can distinguish the reliability of the stock and debt method in this case, and the income that the two parties used--

Justice Alito: Would you disagree if had you 10 totally disinterested experts, not paid by either side, and they engaged in this, that they would not all come to the same number, that there would be a range and probably a fairly significant range?

Mr. Hallward-Driemeier: --There would be a range.

I don't know that it would be a range from 6 to 12 billion.

But... I think--

Justice Ginsburg: Could the district court appoint a special master to help her?

Mr. Hallward-Driemeier: --Well, the district... as in the Tyler Regional Planning case, the Court indicated that district courts frequently have to undertake complicated valuation questions, and they rely on the testimony of experts.

Appointment of a master might well be permissible.

But I want to go back to the textual indications, that this is a question for the Federal court.

There is no question that the statute refers to the burden of proof in determining true market value.

In Burlington Northern, the Court recognized that the allocation of burden of proof demonstrates that it is a fact to be proved to the Court.

In fact, in se, with respect to true market value of the commercial and industrial properties, it specifically says that it is to be proved to the satisfaction of the Court.

Now in Burlington Northern, the Court remarked that it would be unreasonable to construe the statute to lead to strikingly different approaches, whether the railroad's challenge was based on the alleged undervaluation of other properties or overvaluation of the railroad property.

Now, we know from the statute that the court is not to defer to any methodology, or amalgam of methodologies, the State uses in valuing other commercial and industrial property.

Rather, the court is to look to the best evidence of value, which is sales data.

Now, if the court has sales data available to it in the case regarding the value of the railroad, certainly the court should rely on that reliable information, rather than the State's chosen methodology.

Thank you very much.

Argument of Warren R. Calvert

Chief Justice Roberts: Thank you, Mr. Hallward-Driemeier.

Mr. Calvert.

Mr. Calvert: Mr. Chief Justice, and may it please the court.

Subsection (b)(1) constitutes a narrow exception to the normal rule of Federal non-interference in State tax administration that is designed to prohibit a specific type of tax discrimination.

What CSX contends here is that Congress meant this anti-discrimination provision to secure for the railroads what no other taxpayer to our knowledge currently has.

And that is an... an absolute right to come into Federal court, and to have a Federal judge redetermine the market value of its property for State property tax purposes in whatever manner the Federal court finds to be appropriate, without regard to the State's choice of a reasonable valuation method.

Justice Scalia: It seems to be what it says though, isn't it?

Mr. Calvert: Your Honor, I don't think that's what it plainly says.

Justice Scalia: What's the language?

What's the crucial language?

Mr. Calvert: Well, it requires the comparison of--

Justice Scalia: No, it doesn't require... what it say the district court is supposed to find?

Mr. Calvert: --Well, it has to find the assessed value of the railroad, the true market value of the railroads--

Justice Scalia: It's supposed to find the true market value of the railroads.

It doesn't seem to me fuzzy language.

District court is to find true market value.

Mr. Calvert: --Well, I think in large part, the railroad's argument is it places on the one word "true" and the term "true market value" a weight that it cannot bear.

The complaint that the railroads filed in this case, and this is confirmed by the legislative history, acknowledged that the word "true market value" meant the same as "fair market value" or "market value".

Justice Scalia: It's a very strange way of saying the district judge is to... is to ask whether the State has used one of a number of reasonable methods of determining the market value.

To say, go find the true market value is a very strange way of saying that, and that's what you, that's what you're saying it means.

Mr. Calvert: Your Honor, I think if Congress had said the district court is to find fair market value or the market value it would seem... it would seem less strange.

And we think there is going to be a range... any case like this as evidenced by the appraisals... the appraisal prepared by the railroad's appraiser, as evidenced by the State's appraiser.

There is going to be a range of possible market values.

Justice Kennedy: Why would your position be any stronger if it used fair market value?

Mr. Calvert: Well, Your Honor I think in the same way that CSX--

Justice Kennedy: Or any weaker?

Mr. Calvert: --Well, Your Honor, the way that the railroad says you have to look for the one value that's true, I would say that if the statute said "fair market value" the question is there could be many market values that are fair.

Justice Kennedy: What do you mean, we have false "fair market value"?

I never heard of such a thing.

Mr. Calvert: I don't believe so, Your Honor.

But I think... I think there is a range of possible market values that can be considered fair.

Justice Souter: Isn't the point not that anyone is denying that there can be a range, that there... everybody agrees that there is not here, simply because there is not one methodology, there is not an exact science which is operating?

But isn't the real point the point that Justice Scalia made, that when Congress uses the term "true market value", when it has a criterion of truth, the one thing that does seem to be clear is that, if you are looking for truth, you do not defer to a party in interest?

And isn't that the one point?

And if you accept that point, then doesn't it follow that methodology is up to the assessment of the district court.

Mr. Calvert: I would say that's true, Your Honor, but I would say that the statute does not plainly lead to that result.

Justice Souter: How could it say it more plainly than using the criterion of truth?

Mr. Calvert: Well, again, Your Honor--

Justice Souter: Truth... whatever truth means, it doesn't mean deferring to a party in interest.

Isn't that correct?

Mr. Calvert: --Well, I don't believe, Your Honor, that it is possible to say with any type of absolute certainty or precision that one--

Justice Souter: We all accept that.

The question is not whether we're talking about rocket science in valuation.

The question is whether we are deferring to a choice made by the party in interest?

And doesn't the criterion of truth imply that we do not?

Mr. Calvert: --No, Your Honor, I don't think that it does.

Again, if the... if the statute had said what it easily could have said and what the legislative history says it could have said and what CSX complaint in this case acknowledged it could have said, that what the district court had to find was the market value of the property.

Justice Souter: So Congress in effect was engaging in Pontius Pilate's exercise, what is truth?

Justice Scalia: I was expecting you to say, that what is truth?

[Laughter]

Mr. Calvert: Your Honor, I would say that the statute does not plainly require that if a State has determined the market value of the railroad by correctly applying a reasonable valuation method, that the statute an ambiguously allows the taxpayer to come in and challenge that... not just the application of that method but the... but the methodology itself.

Justice Ginsburg: And if you limit it to the application and not the methodology, then Congress's overriding goal was there was a problem with overevaluation of the railroad's property, and Congress was responding to that problem of overevaluating the property.

But if you limit the challenger to just the application, then you are not going to have as vigorous a check on over evaluation as you would have if you could... if you could reach back to the methodology.

Mr. Calvert: Your Honor, I think what CSX would like in this case is to turn the Federal district court, the judge into a board of equalization who has to... who has to consider every... each and every objection to each and every decision that the State that is made in valuing its property.

Justice Souter: But what you are saying is that the... that the court is simply being turned into a grade school math teacher who looks to see whether the sums are added up correctly.

That can't be what Congress had in mind.

Mr. Calvert: Well, no, Your Honor.

That's not our position.

In fact, the objections that CSX had specifically to the State's application of the discounted cash flow were more than what could be fairly described as checking the math.

It wasn't a situation where one number had had the decimal point in the wrong place but there was... there was days of expert testimony, for example, regarding whether the State's use of a 6.3 terminal growth rate in the discounted cash flow was an appropriate number for this railroad.

Justice Souter: In other words, there was... there was a contest about the judgment used by the State in selecting one point of datum in its calculation, right?

Mr. Calvert: That among other--

Justice Souter: All right.

If that kind of judgment... if it makes sense under the statute to put that kind of judgment in question, why doesn't it equally make sense under the statute to put other questions of judgment such as the selection of the methodology to which the data point in fact is relevant?

Where do you stop?

Mr. Calvert: --Well, we think it is... the difference, Your Honor, is, while we believe that a State should have... should have the right to choose among the various reasonable types of valuation methods that can be used in a case like this--

Justice Souter: I know that's why you think.

My question is, if you agree that it's appropriate under the congressional statute to challenge one issue of judgment, why isn't it equally appropriate to challenge other issues of judgment, i.e., selection of methodology?

Mr. Calvert: --Well, because it's one thing to say that the State can choose the valuation formula; it's another thing that the State is able to dictate how you fill in the variables.

If a State can say we're going to use the discounted cash flow analysis but here's the way we're going to--

Justice Souter: Each one, as I understand it, is a question of judgment about what is appropriate on the facts of this case, or these kinds of cases.

Justice Scalia: The trouble is you can't find a... it is a line, but it's not a line you can derive from true market value.

I mean, you can do it, but what in the statute suggests that that's what you should do?

Mr. Calvert: --Well, Your Honor, I believe what you have to find in the statute, because this is a limited exception to the rule that Federal courts will not interfere with the State's administration of its own tax system, is... I think you need to find something in the statute which plainly allows the Federal courts to get into the minutia of not just the way in which the discounted cash flow formula has been applied or not the way in which a stock-and-debt formula has been applied, but its choice at the... at the very beginning to use those methodologies.

Justice Breyer: The reason that they do that is because none of these methods comes even close to working out what the company is really worth because, if we had, we wouldn't be here.

We'd be out in Wall Street.

We'd make billions.

[Laughter]

All right.

So they don't know, and they use all these different methods sort of as checks one on the other.

Now, the railroad simply wants to say: Look, you had an expert here and he went and used a method, and it comes up with a certain number, but if you look at a few other methods, you'll see that's an outlier.

Okay?

Now, why shouldn't it be able to do that?

Mr. Calvert: Well, I guess... Your Honor, I think it's specifically because there is that range of value, that if Congress had intended to... that the district courts would examine each and every decision made by the States deciding it's going to use this method--

Justice Breyer: They're not going to do that.

The State has enormous leeway.

Anyone who valued a railroad running through the center of this city, of what it would be worth if the property were sold on the private market, you'd get an astronomical number.

So the chances of this number being higher than the sales value of private property is not great.

So, if you've come in with some method that puts it higher than that, well, why shouldn't they be able to come in and say: Look, look what they've got with this method, which in our opinion is not a fair method.

Now, why not?

Because after all, if you're going to say they can't, then there is no check on the State working out a method that discriminates, as Justice Ginsburg said, seriously against the railroads.

Mr. Calvert: --Well, I think... I think the result of that, Your Honor, is... is you're going to have a Federal court setting a Federal standard of valuation for Georgia.

Justice Breyer: What they're going to do is they're simply going to let people present the evidence as you've heard, which will have 15 valuation methods if they want, all serving each as checks on the other.

There's no single method.

So why would you end up with that result?

Mr. Calvert: Well, Your Honor, that's what... that's what CSX is... is arguing here today, but that's not what they argued in the district court.

They--

Justice Ginsburg: I thought... I thought you conceded that that was what it would be, because you said that the Federal court would be turned into a board of equalization, and a board of equalization is not making grand law for setting precedent.

Mr. Calvert: --Well, I think, Your Honor, what CSX asked in this case is that... they have taken the position, and I believe they still take it for this Court, that a stock-and-debt method will never give a reliable estimate of the value of the railroad.

So they want... what they want to come out of this litigation is the State of Georgia cannot use that at all.

Justice Ginsburg: I think what they want is to be able to attack the methodology and not be limited to the application of whatever methodology the State prefers.

Mr. Calvert: That's correct, Your Honor, but the point I'm that trying to make is that what they... what they want to see come out of this case is the State of Georgia... not simply that the State of Georgia couldn't use the stock-and-debt methodology for this tax year; they want a ruling that basically says it can't use it for any year.

Justice Scalia: No, I don't think they're not going to get that from this Court, any more than they could get it from the Court of Appeals.

All the Court of Appeals can say, it seems to me, is that the methodology that the district court used was not clearly erroneous.

I think another district court in a later year could probably use a different methodology, which would again be affirmed by the Court of Appeals because it was not clearly erroneous.

We're not... I don't think either the Court of Appeals or this Court is placing any stamp on a particular methodology.

Mr. Calvert: But... but Your Honor, that is what they tried to get from the district court in this case.

Justice Scalia: Maybe they did, but they're not going to get it here--

[Laughter]

Justice Stevens: May I ask this question about your position?

Supposing Dickerson had adopted the stock-and-debt method and taken the $12 million... $12 billion figure and said that's really a reasonable basis, and then he ended up with that value.

Would you be able to defend that decision with precisely the same arguments that you're making today?

Mr. Calvert: --Yes, Your Honor.

Chief Justice Roberts: Well, that's what... I'm sorry.

Justice Stevens: I just wanted to be sure.

Chief Justice Roberts: I thought that would be part of your reply to Justice Breyer, that you had five different methodologies here and you chose the lowest one; and the question really is how many more methodologies do you have to look at if you're going to choose the lowest one in each case.

Mr. Calvert: Well, and that is what we did in this case, Your Honor.

Justice Alito: If it had been... I'm sorry... if it had been Dickerson's methodology at the last step to choose the highest value, would that be reasonable?

Mr. Calvert: Again, Your Honor, I think... I think a State could do that.

You're still within the range of value.

I will say this.

If the State had done that in an effort to overvalue the railroads, or to discriminate against them or to treat them differently than other taxpayers, I think you might have a problem under the statute, but I don't think it's a problem under (b)(1).

I think that would be a problem under (b)(4) which is the--

Justice Scalia: This State appraiser as I understand it had never done an appraisal before of... of this magnitude, right?

Mr. Calvert: --No, Your Honor.

He's done well over a thousand appraisals involving the application of the unit rule.

What he had... what he had not done before is provide a written narrative report much like the railroad's appraiser did, but the valuation work sheets that are attached as part of the joint exhibit basically set out the calculations.

Then when he did his full appraisal report, it includes certain narrative materials, certain explanation of the various methods he used.

But--

Justice Scalia: I'm looking for the footnote, but I... I was, I was impressed by what seemed to me the... the vast difference in... in qualifications and experience of the... of the State appraiser and of the expert who was brought in by the railroads at the trial.

And it seemed to me quite absurd to say we have to defer to... to this novice in the field, and... and not look at the... at the testimony of... of someone who has done a lot of it before.

Mr. Calvert: --No.

The State's appraiser, Your Honor, had done, had done well over... well over a thousand of these types of appraisals.

He has taught in national schools on these issues.

He has published in State and national journals on these issues, so we contend that his... his credentials are--

Justice Scalia: Did you have a response... did you have a response to that footnote?

I didn't--

Mr. Calvert: --Yes.

We do, Your Honor.

Justice Scalia: --I'm sorry.

I must have skipped that.

Mr. Calvert: We have our own footnote.

Justice Scalia: A little footnote battle here, right?

Mr. Calvert: That is footnote 3, Your Honor.

Justice Scalia: Of yours?

Mr. Calvert: Of our brief.

Chief Justice Roberts: You know, if this comes down as it probably will in every case, to a battle of competing experts, are you aware of any other area where we say that a district court cannot look at the methodology used by an expert in determining whether or not to give credence to the expert's opinion?

Mr. Calvert: No, I'm not, Your Honor.

Chief Justice Roberts: So why should we create a special rule here for the State?

Mr. Calvert: Well, this is a... this is a special statute and again I think what CSX is asking for this... for this Court to do is create a special rule for it which gives it, unique among taxpayers, as far as we are aware, the right to come into Federal court and challenge each and every decision that the State has made in valuing property for property taxes and have the Federal court redetermine that value.

Justice Souter: Well, if... I take it to determine how far you could go with that, I take it though in your view if the State's appraiser had never done an appraisal before in his life, if he were plucked off the street by the State and said, you know,

"appraise the railroad property; we are making you a State appraiser. "

on your view the district court could not look behind that?

Mr. Calvert: Well, the district court could certainly thoroughly examine the way in which the... the reasonable valuation methodologies that the State selected were applied.

Justice Souter: Exactly.

But the selection of the methodology by the guy off the street could not be examined.

Mr. Calvert: Well... well, Your Honor, we think the methodology has to at least be reasonable.

Justice Souter: Well, it's... it's one of the recognized methodologies.

Mr. Calvert: I think if the State has used--

Justice Souter: It happens to be the one that gives the highest number.

But it's a recognized methodology and there are certain... certainly examples in which that methodology has been used, and I take it that if the guy off the street picks one of those, and that's all we know about it, the district court on your view cannot look behind it.

Mr. Calvert: --I'd say that's correct.

If it's a widely used accepted valuation methodology like the ones the State used in this case, that the question--

Justice Scalia: And that's what you have here.

I've looked... I've looked at your footnote and I see that indeed Mr. Dickerson did have over 30 years experience including well over a thousand valuations... performed under the unit rule; performed under one method of evaluation, right?

Mr. Calvert: --The--

Justice Scalia: But the whole issue here is that that method of valuation, however expert he is at it, is not proper here.

It doesn't work.

That there are other ones that should have been brought to bear.

Justice Ginsburg: I thought both sides agreed that the unit--

Justice Scalia: Was one of the ones, yes; but that's not the only one.

That's the only one he is an expert in.

Mr. Calvert: --Both sides agree that the unit rule is appropriate in this case.

The question then is how to... how to determine what the unit value of the company was; but there is no dispute in this case that the unit rule is appropriate.

So the appraisals that the State's appraiser had performed under the unit rule are exactly the type of appraisals--

Justice Scalia: And it's different methodologies under the unit rule.

He has used... he has used different methodologies under--

Mr. Calvert: --Than the railroad did.

Correct.

Justice Ginsburg: --I guess the term methodology is confusing because you could think it means unit rule--

Mr. Calvert: Right.

Justice Ginsburg: --or you could think how under the unit rule, what is the--

Mr. Calvert: That's right, Your Honor.

If I could make... if I could make one point about the unit rule and the choice between the unit rule and what we refer to as the summation approach, the specific dispute in this case has been between the various methods for determining what the unit value of the company was for 2002 under the unit rule... but the argument that CSX is making in this case would also put... put into play a State's most fundamental methodological choice between the unit rule and the summation approaches, and CSX's reply brief admits as such.

The railroads had made... had made such an argument in the Chesapeake Western case out of the Fourth Circuit where... where Virginia's courts had held that the unit rule was not an appropriate valuation method under their statutes to arrive at fair market value, the railroads came in and said under the 4-R Act, we are entitled to put on proof under the unit rule as to what our fair market value, that the Federal statute makes all that open; the district court has to consider all that evidence.

And what the... and the Fourth Circuit rejected that argument, but that's the implication.

Chief Justice Roberts: What if what if the State elected to use reproduction cost as its valuation method, which I guess everybody agrees vastly overstates the value of the railroad?

Mr. Calvert: Well I think the problem, Your Honor, with reproduction cost is... is how to... is how to accurately account for obsolescence.

My understanding of the objection--

Chief Justice Roberts: So if there are problems with a particular methodology, the methodology can be challenged?

Mr. Calvert: --It's possible, Your Honor, that a reproduction cost methodology might... might so inadequately deal with the issue of obsolescence that you just have to say that's not a reasonable methodology, as applied to railroads.

Justice Souter: How could you say it on your theory?

Mr. Calvert: Pardon me?

Justice Souter: How could you say it consistently with your position here?

Mr. Calvert: Well, I think, Your Honor, the court is allowed to examine whether you have a... whether the State has used a reasonable methodology.

Justice Souter: Then why doesn't the court have an opportunity or the right to examine whether any particular methodology is reasonable as applied to this taxpayer and this kind of property at this time?

Mr. Calvert: Well, I think that goes to the question of whether you have properly applied a reasonable valuation method, and there is--

Justice Souter: I thought... I thought you were saying that the reproduction method had such severe problems associated with it that it simply would not be a fair methodology to use and at least a reviewing court, a district court could... could draw that conclusion.

I thought that was your answer.

Mr. Calvert: --Well, I think it depends, Your Honor, on if you have a reproduction cost method that you have applied to property that... property that has only just recently been purchased, then I don't think you're going to have a problem with it at all, even--

Justice Souter: We are talking about the railroads like CSX, and I thought your answer was that a... a district court could conclude that as applied in a case like this, that there are so many problems that it simply would not be a reasonable valuation method.

Mr. Calvert: --I... I think that is possible.

Justice Souter: All right.

Then well then how do you draw a line?

Mr. Calvert: Well again, Your Honor, I think--

Justice Souter: If you can do that, why can't it do what... what your brother is saying it should do in this case?

Mr. Calvert: --Well, I think, Your Honor, that in... in... in... again, I don't think that is the argument they have made in this case.

Justice Souter: Well, let's assume I'm making that argument now in my question.

Why... why can you draw the line that you want to draw?

Mr. Calvert: Well again, I think that goes to whether the application is going to be... is going to be reasonable in the particular situation.

Chief Justice Roberts: Right.

And your argument is that it's not reasonable because it must overstate the value by a particular percentage or number.

And I think Justice Souter's question is: Well, where do you draw the line?

If you say it's not reasonable because it overstates value by 50 percent, is a methodology that overstates value by 20 percent reasonable or not--

Mr. Calvert: Well, I--

Chief Justice Roberts: --keeping in mind all the methodologies here range from 8... 6 billion to 12 billion.

Mr. Calvert: --And I... I think, if you looked at the mid-point of the ranges that each... each of the appraisers had, you would have a variation, maybe, of about 20 percent either way.

Again, I don't think that's going to be determinative as to whether you've got a reasonable methodology, whether it's been properly applied, and what that range is.

I think that's the nature of the... of the appraisal task that States have.

Justice Scalia: --Mr. Calvert, can you tell me how this thing works, or how it may work in the future?

Does the State just whip up a number and lay it on the railroad, or... or, in fact, is there some discussion each year between the railroad's experts and the... and the State's experts as to what the right number should be?

Mr. Calvert: What happens, Your Honor, is that the railroad returns are filed with the State; and there is a period of time during which the State examines those returns, takes the evaluation methodologies that it has selected, applies it to the data that it has for those particular companies, comes up with numbers.

Those... that information, typically, is shared with the railroads.

For them to come back and say: Well, we think you've used cost of capital that's too low; we think you've done... done this; this number really, we believe, should be--

Justice Scalia: Okay.

So there is some give-and-take discussion before the State comes down firmly and says: Cough up the money?

Mr. Calvert: --Typically, Your Honor.

Justice Scalia: Okay.

Justice Stevens: I take it this question about the unit rule... I take it Georgia is figuring out what the entire value of the railroad is throughout the country.

Have other States had to make the same determination to apply their unit rules?

Mr. Calvert: I'm sorry, Your Honor?

Justice Stevens: Let's say, do Tennessee and Mississippi have to also apply the unit rule to value the property of this particular railroad?

Mr. Calvert: I think... I think the majority of States that value railroad property use the unit rule.

Justice Stevens: Is it admissible evidence to find out what other... figures other States have come up with?

Because you're all taking the same answer, aren't you--

Mr. Calvert: I--

Justice Stevens: --if you all use the unit rule?

Mr. Calvert: --We are, Your Honor, though if a State is using a different methodology to determine the unit rule, I think you would probably expect--

Justice Stevens: What if the evidence shows that 49 States have come up with a valuation of $5 billion, and you use a method that comes up with $8 billion?

Would that be admissible evidence?

Mr. Calvert: --I think it probably would be, Your Honor.

Justice Stevens: And does the record contain any such evidence in this case?

Do we know what other States have found.

Mr. Calvert: I think the evidence in this case was that the State of Georgia's unit value, at least within the southeast States, was... was the largest number.

Justice Stevens: Was the highest?

Mr. Calvert: That's correct.

Justice Stevens: Doesn't that raise some suspicion about maybe they have a different approach than is commonly applied seeking precisely the same answer to precisely the same question?

Mr. Calvert: Well, Your Honor, I think our... our response is that we believe that in 2002 what the State did was not only to make some changes in its valuation methodologies, but it also made a fairly significant change in the income numbers that the State was using to apply its discounted cash flow analysis.

And specifically what it did: It started using... instead of numbers from the regulatory report, the R-1 report that the railroads filed with the Surface Transportation Board, it began to use income numbers from the annual reports to shareholders.

There is a significant difference in those numbers, and the testimony in this case was that the 47 percent increase that CSX saw in its assessment from 2001 to 2002 was attributable to the difference in the income numbers that were being used.

I suspect that for many of the other States that have low numbers for CSX, that they still use numbers from the regulatory reports as opposed to the annual reports.

So that's one reason that I believe we've got... we had such a larger number for 2002 than many other States, because our appraiser was looking to the correct income numbers.

If I could, just in the remaining time that I've got, I'd like to mention a couple of points.

The CSX has contended that this line between method and application is simply unworkable; and, therefore, the Court shouldn't recognize any... any such distinction under the statute.

We think there are a couple points where the lines are clear.

One is between the unit rule and the summation approaches.

The brief filed by the Association of American Railroads acknowledges that those are two different methods.

It's not... one could not say that a stock and debt method is just an application of discounted cash flow, so there are certain places where those lines are clear.

We believe the fact that the line may not always be... or the boundaries may not always be perfectly distinct, or that the test may not always be what it might be easy to describe in the abstract... it doesn't mean that the distinction should not be recognized at all under the statute.

Also, there is the way in which the Eleventh Circuit formulated the test where the Eleventh Circuit said a line bar between method and application was between nonfactual determinations used in constructing the valuation process, however broad or narrow they might be.

The Court said that constitutes the method.

Everything else is an application.

The suggestion has been made by the Solicitor General in their brief that... that that means as long as the State can announce or can set out its valuation rule in general enough terms, make it general enough, then that will become part of the method and not part of the application.

I think if the Eleventh Circuit's opinion is read in context, the Eleventh circuit didn't say that.

Specifically, the Eleventh circuit was distinct... was saying... was rejecting the argument in that case that only the distinction between the unit rule and the summation approach is... was the only methodological distinction.

And the Court was saying: We think that differences in methodologies include the stock and debt, the discounted cash flow, and the market multiples approaches used in this case.

So the Eleventh Circuit did go and consider the argument that the State had... should not have used a 6.3 percent terminal growth rate in the discounted cash flow analysis even though that it used that in... in all... for all public utilities.

Rebuttal of Carter G. Phillips

Chief Justice Roberts: Thank you, Mr. Calvert.

Mr. Phillips, you have three minutes remaining.

Mr. Phillips: Thank you, Mr. Chief Justice.

I will try to be brief.

First of all, Justice Stevens, in response to your question on the comparisons between Georgia and other States, on page 22 of our cert petition we pointed out that in the 2006 tax year Georgia and Florida had adopted unit values of $11.2 billion and $12.9 billion; whereas, every other State in those jurisdictions that used the unit value had an assessment value of $7.1 billion.

And the Respondent State did not question that.

So I mean the reality is there are wide swings, and it does make a difference what methodology you do, and it's part of the reason why it's absolutely critical that the Court should enforce the language of the statute.

As Justice Scalia quite properly recognizes, it is the true market value.

And this is not a statute like, for instance, 28 U.S.C. 1254(d)(1) in AEDPA, which says the Federal courts should defer to any reasonable determination by the State courts in a judgment Federal law.

This is a statute that vests the district court with the exclusive authority to make the determination of the true market value.

Chief Justice Roberts: I mean I assume that's in the normal context of the adversary process.

In other words, the district court does not necessarily have to come up with a number independent of what the parties present to it.

Mr. Phillips: No.

Chief Justice Roberts: It can decide which of the presentations is closer to true market value.

Mr. Phillips: Absolutely.

And that's... and that's exactly the point, Mr. Chief Justice.

There isn't any single method that's out there.

All we have are a series of evidences of value, and the district court needs to be able to evaluate them without regard to some kind of thumb on the scale of the State, in favor of the State.

And as you asked the question, you know, is there any other valuation process that would work this way, the answer was no.

And the problem is that there is nothing in this, in this statute that remotely suggests that Congress would have wanted to do anything other than the ordinary or typical valuation in this context.

Justice Souter, I think you made the point, which is the one I wanted to make in my opening statement, which is how is it possible that Congress recognizes decades of discrimination involving tens or hundreds of millions of dollars would have said and now when you get to the point of trying to correct that discrimination, what are you going to do?

Defer to the entity that's been discriminating for all of those years.

It is at least passing strange, if not incredible to think that that's what Congress meant.

It is much more sensible to think that Congress wanted the district court to serve as a serious check on what the state did.

That's what we didn't get in this case.

That's what we are entitled to.

I urge the Court to vacate and to revamp.

Thank you, Your Honor.

Chief Justice Roberts: Thank you, Mr. Phillips, the case is submitted.