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Union Pacific Railroad Co. v. Wisconsin Department of Revenue

United States District Court, W.D. Wisconsin

March 5, 2019




         Plaintiff Union Pacific Railroad Company (“Union Pacific”) filed suit against the Wisconsin Department of Revenue (“DOR”) and its secretary, Richard Chandler, seeking injunctive and declaratory relief concerning adjustments to its 2014 and 2015 tax returns totaling $2, 631, 104.77 in principal and interest. At the end of February 2018, the parties stipulated to and this court entered an order preserving the status quo, directing defendants not to: (1) “collect the disputed taxes”; (2) “take any of the actions authorized for delinquent taxes” under Wisconsin law; or (3) “initiate any actions to record or enforce a lien upon any property of [plaintiff] for the disputed taxes.” (Feb. 27, 2018 Order (dkt. #21) 1.) Before the court are the parties' cross-motions for summary judgment. (Dkt. ##24, 33.) For the reasons detailed below, plaintiff's motion is granted and defendant's is denied.


         A. Background

         Chapter 70 of the Wisconsin Statutes contains the state's general property tax statutes, including those governing industrial and commercial taxpayers. Taxes authorized by Chapter 70 are based on property assessments performed by local assessors, except for manufacturing properties which are assessed by DOR. The Wisconsin Legislative Fiscal Bureau (“LFB”), a nonpartisan entity that provides fiscal and program information and analysis to the Wisconsin Legislature, issued Informational Paper 13 in January 2017 about Wisconsin's Property Tax Level.

         As set forth in the chart below, the total property tax levy for 2015 in Wisconsin was $9.4 billion, of which $2.6 billion was against industrial and commercial properties. Of that latter amount, roughly 10% was for personal property.

Type of Taxpayer

Total Property Tax Levied

Tax Levied on Personal Property

Commercial Property Owners

$2.2 billion

$197 million


$363 million

$65 million


$2.6 billion

$262 million

         In contrast, as defined in Wis.Stat. § 70.11(39), “intangible personal property” is exempt from the state's general property taxation provisions. Since the 1999-2000 Wisconsin Legislative session, one recognized type of exempt, intangible personal property has been “custom computer software, ” which refers to software that was internally developed, owned, and operated by the taxpayer. The Wisconsin Legislative Fiscal Bureau opines that “[c]ustom software is exempt as an intangible under s. 70.112(1) of the statutes.” (LFB Paper #1043 (dkt. #30-3) 1.) Union Pacific agrees that LFB Paper #1043 includes that statement, but notes that the statement is only “the author's non-authoritative interpretation of the law.” (Pl.'s Resp. to Defs.' PFOF (dkt. #38) ¶ 3.)

         B. DOR's Audit of Union Pacific

          Union Pacific is a Delaware corporation with its principal place of business in Omaha, Nebraska. As a common carrier engaged in interstate commerce by rail, Union Pacific operates in Wisconsin, among numerous other states. Under Subchapter I of Chapter 76 of the Wisconsin Statutes, the DOR is authorized to assess railroad property and collect property taxes. The following chart sets forth the amounts of annual property taxes levied against all railroads in Wisconsin from 2012 to 2017:




$28, 390, 765.12


$31, 318, 995.78


$33, 903, 738.10


$36, 782, 519.23


$41, 731, 761.65


$43, 602, 821.87

         Subchapter I also provides for the assessment and taxation of other “utilities, ” including “all conservation and regulation companies, ” “all air carriers, ” and “all pipeline companies.” Wis.Stat. § 76.01.

         Since at least the 2006 tax year, Union Pacific has reported its custom computer software as exempt property in its filings with DOR. Union Pacific also provided DOR with a copy of a fair market appraisal of its custom computer software. That appraisal was performed by Robert Reilly, an expert in valuing intangible assets, who assigned a total value of Union Pacific's custom software at just over $5 billion for 2014 and at $6.2 billion for 2015.

         In 2016 and 2017, DOR conducted its own audit of Union Pacific's property tax assessment for tax years 2014 and 2015. Following that audit, DOR issued an “Omitted Property Assessment Notice” on September 6, 2017, asserting that Union Pacific owed an additional $2, 631, 104.77 in taxes and interest for the combined years 2014 and 2015, based on an adjustment required to “add back property incorrectly claimed as exempt.” (2017 Omitted Property Assessment Not. (dkt. #27-1) 1-2.) The Notice further demanded payment by September 15, 2017.

         In particular, the Notice explained that: (1) “[a]n adjustment was made to correct the reporting of custom software excluded . . . by including the amount of custom software in the ‘System Total -- Equipment' section of the Road & Equipment schedule of the Railroad Annual Report”; and (2) “the custom software claimed as exemption . . . was determined to not qualify, ” so that it needed to be “added back to Wisconsin value.” (Id. at 2.) The parties agree that DOR's disallowance of Union Pacific's custom software exemption alone resulted in $802, 097.44 and $1, 162, 904.95 in additional taxes for 2014 and 2015, respectively, plus interest.

         While the parties dispute whether Union Pacific included its custom computer software in its “total value in the first instance” (Pl.'s Resp. to Defs.' PFOF (dkt. #38) ¶ 16), there is no dispute that the DOR's adjustments added $37, 898, 985 and $57, 961, 406 in property value for tax years 2014 and 2015, respectively, using a different valuation method than Reilly. In the end, Union Pacific opted not to pay the tax, and filed suit instead, originally suing DOR in Dane County Circuit Court on October 5, 2017, challenging the Omitted Property Assessment on ...

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