State officials realize a method to assess property tax on commercial and industrial property missed the mark in 1984 and 1985, a lawyer for the state said Wednesday.

The admission came during closing arguments before U.S. District Court Chief Judge Bruce S. Jenkins, in a suit by three major railroads challenging the state tax assessment.Southern Pacific Railroad has compromised its differences, but Union Pacific and the Denver & Rio Grande Western railroads are pursuing their case.

Rex Madsen, representing the State Tax Commission, told Jenkins that an evaluation of railroad property under a now-discarded formula concluded that in 1984, Union Pacific was worth $3.6 billion, and in 1985, $4 billion; the D&RGW was valued at $340 million in 1984 and $375 million the next year.

However, a new formula used by the state, under which appeals of commercial and industrial property taxes for '84 and '85 are also calculated, places a different value on the railroads.

According to the state, the present system pegs Union Pacific's worth in 1984 at $3.7 billion, and in 1985 at $3.46 billion; for the D&RGW, it calculates a 1984 value of $320 million and a 1985 figure of $320 million. These figures represent the rail lines' national value.

Using Madsen's figures, for 1984 the state calculated a basic value for the railroads that was $80 million less than it was. For 1985, it figured the value of the two rail companies as $595 million more than it was.

As with tax on an automobile, the property tax would amount to only a small portion of the railroads' actual value. In addition, only a small amount of the railroads' overall value is in Utah.

These overall property values are divided up among the states through which the railroads' tracks pass. The various states can tax them according to the amount of rail property in those states.

About 5 percent of Union Pacific's property is in Utah; not much more than 25 percent of the D&RGW's facilities are in this state.

Still, this means Utah's property tax base for 1985 may have been overestimated by about $27 million for Union Pacific alone, and by about $13.75 million for the D&RGW, if the state's new formula is accepted as accurate.

Utah state taxes on this base would be divided among counties in which the railroads have tracks, terminals and other property.

Attorneys for Union Pacific and the Denver & Rio Grande agree that the original calculations were wrong. But they contend that the new system is still incorrect.

"Their methodology does not pass muster," said Robert A. Peterson, representing the railroads. "It has data problems. . . . It has calculation problems. It has mismatches of times, and it produces results that do not make sense."

Madsen said the earlier calculations were made by people "who are no longer with the tax commission." The same formula was used on all of the state's approximately 350 utilities during 1984 and 1985, he said.

"The state has changed some of those methods because they were in error," he conceded. Taxes for those who challenged their assessments were recalculated, based upon the new formula.

He said the earlier formula was not inappropriate for the time, but that it has been improved since then.

Jenkins asked whether the state's stand is: that the railroads had a point in most instances, that this is acknowledged to a certain level, "and beyond this we will not go."

Madsen said that is the case. He wants the court to uphold the present methodology and valuation, so the railroads won't sue every year over the issue.

Meanwhile, Union Pacific and the D&RGW asked for a ruling that the tax commission was treating them differently from other sorts of property, violating a national law.

But Madsen said any changes in the tax formula shouldn't give the railroads a preferred status over the state's other utilities.