Source: http://arizonatax.com/taxappeals/recentboarddecisions2.htm
Timestamp: 2019-04-24 22:19:50+00:00

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The taxpayer contended that she did not earn any income subject to tax for the years at issue. However, the Board concluded that W-2s issued to her for 1998 clearly reflect what wages and pension income she received. The U.S. Supreme Court has held that such income is taxable.
The taxpayer was in the business of providing financial services with one of them being the financing of consumer receivables (essentially credit card accounts) purchased from retailers that sold products on a time sales basis. The taxpayer purchased such accounts non-recourse, meaning that the retailer was not liable to the taxpayer when a card holder defaulted on payments. The taxpayer paid the retailers 100% of the face amount for the receivables which was the balance of the purchase price of the merchandise plus all of the applicable state and local tax. Some of the receivables became uncollectible after the taxpayer purchased them and it claimed bad debt deductions on its federal income tax return. It subsequently filed a claim for refund of Arizona transaction privilege tax paid by the retailers from which it purchased the receivables. The Department denied the refund claim and the Board affirmed that decision. The taxpayer argued, as the assignee of a retailer on a non-recourse basis, it had all the rights, title and interest of the retailer in the credit card account. Accordingly, it had the right to a refund of the full amount of tax paid on the underlying transaction when the customer defaults. The Board, though, disagreed that the retailers could assign their rights to a tax deduction to the taxpayers. The retailers who sold their receivables to the taxpayer sold them for 100% of their face value and without recourse. By doing so, the retailers were made whole. They suffered no loss and could never experience a bad debt with respect to those receivables. Since the retailers had received full payment and would not have had bad debts on the accounts sold, they could not assign to the taxpayer right to a non-existent bad debt deduction.
As a follow up to its substantive appeal, the taxpayer submitted a reimbursement for fees expended in establishing that he was entitled to bad debt deductions of which the Board agreed. The Board, however, did not believe he was entitled to fees for defending against the Department's tax assessment. The Board concluded that the Department's denial of the bad debt deduction was substantially justified. The taxpayer, throughout the administrative appeals, continued to modify the amount of bad debt deduction he claimed he was entitled to and did not submit documentation that sufficiently supported the reduced deductions until the hearing before the Board.
The taxpayers are residents of Alaska during the years at issue. Beginning in 1992 they invested in Arizona real estate through an Alaska S corporation. The investments resulted in large losses until 1998 when much of the real estate was sold at a substantial gain. The taxpayers included the yearly losses in their federal adjusted gross income for 1993 through 1997. Neither the taxpayers nor the S corporation filed any Arizona returns until 1998. In 1998 the taxpayers filed an Arizona nonresident personal income tax return reporting Arizona income from the sale of their investments. They subsequently filed an amended return for 1998, carrying forward net operating losses for the year 1993 through 1997 when the taxpayers did not file Arizona returns, claiming a refund. The taxpayers did not include the NOLs on their 1998 federal return because they had been reporting on federal returns in prior years. The Department denied the claim for refund. The taxpayers argued that the refund was justified on the equitable grounds that they received no tax benefit in Arizona from the years of the S corporation losses and, thus, should be allowed to reduce their 1998 gain by that amount. The Department contended that under Arizona law there was no basis for an individual net operating loss deduction separate and apart from an NOL that was reflected in federal adjusted gross income and denied that there was any general tax benefit rule that would produce the result the taxpayers sought. However, the Board ruled for the taxpayer on another theory. Under A.R.S. � 43-1091, when dealing with a non-resident, the portion of federal adjusted gross income representing income from Arizona must be determined. For S corporations the amount of Arizona income of the corporation must be determined under A.R.S. � 43-1126. Under A.R.S. � 43-1122.8, the Arizona taxable income of a corporation shall be determined after subtracting from Arizona gross income "[t]he amount of net operating loss allowed by A.R.S. � 43-1123." One of the types of NOLs under that section provides that net operating loss means the excess of the subtractions specified in A.R.S. � 43-1122 over the sum of Arizona gross income plus the additions under A.R.S. � 43-1121. Among those subtractions is one for the amount of income from a DISC required to be included in the income of its shareholders under the Internal Revenue Code. There is no mention for any of the adjustment for the amount of income or loss from an S corporation required to be included in the income of its shareholders under the Code. Under the doctrine of Inclusio Unis Est Exclusio Alterius, the specific inclusion of one type of corporation that has its income taxed to its shareholders should be interpreted to absolutely exclude any other corporation which has its income taxed to its shareholders. Accordingly, the Board concluded that for purposes of calculating an S corporation NOL, there was no adjustment to the amount available to the corporation for amounts passed through to the shareholders. As a result, the S corporation had NOL carryovers to 1998 for the proceeding 5 years.
The taxpayer, Superstition Homes, Inc. was a contractor which operated under a contracting arm/marketing arm structure with its affiliate Superstition Stales, Inc. In December of 1994, the taxpayer entered into an agreement to sell all of its assets to Great Western. The assets consisted of contracts for the constructions of homes and options to purchase lots. The contracts for the constructions of homes sold to Great Western were contracts for homes for ground that had already been broken and contracts where no ground had been broken. By the terms of the sales agreement, the taxpayer hired Great Western as a construction manager and agreed to pay it $5,000 for construction management services on each house where ground had already been broken. The taxpayer retained all profits from the sale of these homes and collected and paid the transaction privilege tax under the prime contracting classification. Great Western received all profits from the completion and sale of contracts where ground had not yet been broken. The Department audited the taxpayer and added a 5% profit margin to amounts reported as the taxpayer's costs to determine its tax liability. The taxpayer claimed that the figures used by the Department were mistakenly designated as costs or expenses on its general ledger but were actually loans made to Great Western to complete the construction of the houses for ground that had not been broken. Great Western completed and sold these houses, paid the applicable tax and repaid the loans made by the taxpayer. The taxpayer designated the loan repayments as construction costs. The Board concluded that while the taxpayer had mischaracterized its loans and loan repayments on its general ledger and tax returns, the undisputed testimony as to the true nature of these amounts demonstrated that it was not a prime contractor during the audit period.
The Department determined that the taxpayers were liable for sales tax under the retail sales, personal property rental and jet fuel tax classification. Portions of the assessment were reduced by the Office of the Administrative Hearing and the Director, but the remaining issues were appealed to the Board. At issue was whether the taxpayer sold airplanes or merely provided non-taxable broker services in the connection with the sale of airplanes. Evidence submitted by the taxpayers, including documents showing chain of title, letters from some customers, some out of state FFA registrations and sworn testimony by the taxpayers supported their claim that they never had title or physical possession of the airplanes at issue. Therefore they were not engaged in the business of selling airplanes at retail. The taxpayers also argued that their sales of jet fuel to the federal government were exempt because the sales took place on an Indian reservation and the government used the fuel in aircraft that were operated on the reservation. The Board held that the U.S. Supreme Court had established that contracts between a contractor and the federal government to perform work on an Indian reservation were taxable and rejected the taxpayers argument that recent U.S. Supreme Court decisions were wrong and should only be applied prospectively.
Mandan, the taxpayer, was a contractor which the Department determined was liable for sales tax on income from five contracts with the federal government for work performed on Indian reservations. Previously, it had filed amended returns and a claim for refund for construction work performed on reservations for the Hopi Housing Authority and the Bureau of Indian Affairs. The Department granted that refund request. Thereafter, the Department audited the taxpayer, initially assessing tax on all work performed on Indian reservations pursuant to contracts with non-Indians. The taxpayer protested the assessment and the Department subsequently agreed to amend the assessment to exclude four jobs performed for Indian Health Services and the Bureau of Indian Affairs. The parties eventually settled the entire proceeding. The Board concluded that the taxpayer was not entitled to any relief. In 1999, the U.S. Supreme Court held that a state could tax income from activities performed on an Indian reservation pursuant to a contract between a contractor and the United States government. The taxpayer argued that the decision should not apply retroactively but the Supreme Court was clear in its recent decisions that its determination as to retroactive application is final. The Board also rejected the taxpayer's argument that the Department was estopped from assessing the tax at issue, contending that the Department's action in the prior refund and audit proceedings constituted the Department's formalized position that contracts like the ones at issue were not taxable. The taxpayer claimed that it relied on that position and did not collect tax on the current contracts as a result. Thus, the reliance was reasonable and the Department was estopped from changing its current position. The Board disagreed, holding that the Department's decision not to fight a refund claim or a protest to an assessment or to negotiate or settle with the taxpayer, does not constitute a formal position on a particular issue. The Department has limited resources. Using its discretion in strategically choosing to contest some actions and not others does not rise to the level of formality required for estoppel.
The taxpayer was in the business of selling and leasing two-way radios, pagers and wireless phones. He also provided two-way radio and pager services for a monthly fee. The Department determined that he properly reported sales tax under the retail and rental classifications but failed to report and pay such tax for the telecommunications classification. The Board rejected the taxpayers argument that he was entitled to a deduction for bad debts during the audit period. The applicable regulation provided that in order to obtain the deduction for bad debts, the gross receipts from the transaction on which the bad debt was taken must be identified and reported as taxable. The Department argued that records previously provided by the taxpayer did not show that the transactions were so identified and reported. However, the Board found that documentation submitted for its review satisfied the regulation, has internally consistent and supports the deductions claimed. The taxpayer also argued that additional interest in the assessment should be reduced due to unreasonable error or delay by the Department. During the appeal to the Director prior to the Board proceeding, the Director abated a portion of the interest due to delays by the Department. The taxpayer did not establish to the Board that the Director abused his discretion in not waiving the remainder of the interest.
The taxpayer was in the business of acquiring automobiles for customers. Mr. Karas met with potential buyers, discussed what type of vehicle the customer desired and what the customer was willing to pay for it. The customer would give the taxpayer money in advance, which included the cost of the vehicle plus the taxpayer's profit. The taxpayer would deposit the money into a bank account, locate potential vehicles through its contacts, and use an auto dealers license to purchase the vehicles tax free. The taxpayer would pay the seller for the vehicle out of his bank account and receive an open title, which meant that the buyer was not specified. The taxpayer would then give the open title to its customer. The taxpayers argued that these were not taxable transactions under the reasoning of Stillwell Grand Prix Motors v. City of Tucson, 168 Ariz. 560, 815 P.2d 929 (Ct. App. 1991). Stillwell resulted in that taxpayer not being liable for any tax because there is no transfer of tile or possession of those particular cars within the City of Tucson. In this case, the Board determined that the taxpayers transferred title and possession of the vehicles in interest to customers, rendering Stillwell inapplicable. Further, the Board determined that the taxpayer frequently took possession of vehicles, notwithstanding its testimony to the contrary. Finally, there was no evidence that the taxpayer was merely acting as an agent of the sellers in dealing with his customers. Accordingly, the Board rejected the taxpayers contention that he was merely a consultant, not engaged in the business of making retail sales and upheld the tax assessment.
The taxpayer engaged in a general contracting business, excavating and installing cable for various cable television systems in Arizona. During the audit, it performed worked pursuant to contracts with the related entities Time Mirror Cable Television of Arizona and Dimension Cable Service of Arizona. The work was ultimately for the benefit of American Cable Television, Inc., another related entity which possessed the non-exclusive right to construct, reconstruct, maintain and operate the cable television systems at issue. The Board affirmed the Department's assessment of tax under the prime contracting classification. It rejected the taxpayers contention that it was an exempt subcontractor and that Times Mirror and Dimension were the taxable prime contractors. Because American Cable Television actually had the right to construct the cable systems, the taxpayer argued that Times Mirror and Dimension must have entered into contracts with it to perform the construction. Because Times Mirror and Dimension coordinated construction and were responsible for the completion of the contracts, the taxpayer argued that they were the taxable prime contractors. However, the taxpayer was unable to present any evidence supporting that argument. Because American Cable Television, Times Mirror and Dimension were all related entities, Times Mirror and Dimension may have had the ability to act on behalf of American Cable Television. More likely, any contracts that American Cable Television had with Times Mirror and Dimension may have been for the operation of cable systems rather than contracting. Notwithstanding, the taxpayer did not establish that it was an exempt subcontractor.
Under A.R.S. � 43-1071, Arizona residents may claim a credit for net income tax imposed by and paid to another state. Income that the tax is based on must be derived from sources within that state and be taxable irrespective of the resident of the recipient. Further, the creditor shall not exceed such proportion of the tax payable under [the income tax provisions] as the income subject to tax in the other state. . . and also taxable under [the income tax provisions] bears to the taxpayer's entire income upon which the tax is imposed by [the income tax provisions]. During 1995, the Arizona regulations defined "income subject to tax" as Arizona adjusted gross income with all exemptions added back. The resulting figure was the denominator used to calculated the credit. Income taxable to Arizona and also subject to tax in New York was the numerator in the calculation. The resulting percentage was multiplied by the Arizona tax liability to determine the credit allowed for taxes paid to New York. The taxpayers claimed a credit for tax paid to New York on their 1995 Arizona resident income tax return. The Department disallowed the credit. Before the Board, the taxpayers argued that the Arizona regulations exceeded the scope of the Department's authority and that the proper denominator in calculating the credit issue was Arizona gross income minus exemptions and deductions. That would result in a larger credit for the taxpayers. The Board found that this approach was not in accord with A.R.S. � 43-1071. It applied a gross income concept to the New York income numerator of the credit fraction but a net income concept to the denominator by reducing total gross income in the denominator by exemptions and deductions. By contrast, the Department's regulation was reasonable and in accord with the apparent objective of the statute. The Board upheld the Department's adjustment of the taxpayer's credit.
After working with the taxpayer to resolve various disputes informally, the Department subsequently modified its tax assessment, reducing the amount of tax and interest and abating all penalties. The taxpayer continued to protest tax on two transactions and the remaining interest. The Director of the Department abated the interest for periods totaling 21 months but otherwise upheld the assessment. The Board affirmed that determination. The Director determined that 21 months of interest was due to delay caused by the Department and the taxpayer offered no additional evidence and did not establish that the Director abused his discretion in not abating interest for additional months.
The taxpayers were engaged in landscaping, masonry and rock businesses in Arizona. They contended that they were not liable for the assessed contracting tax at issue, claiming that the developers of the projects in which they were working were the taxable prime contractors. The Board held that the taxpayers failed to provide any of the statutory subcontractor certificates which would establish that they were not prime contractors on the various jobs. The Board had also repeatedly held that a developer was not a prime contractor and that there is no proof that anyone else was involved in the projects performed during the audit period was taxable as a prime contractor or owner builder.
During the audit period, the appellants, reported their business income under the retail classification, claiming certain deductions for transactions with the U.S. government and excluded income attributable to exempt sales for resale. The Department determined that the taxpayers were engaged in the business of job printing and that its income should have been reported under that classification. Because the deductions for transactions with the U.S. Government do not exist under the job printing classification, they were disallowed by the Department. The Board upheld the Department's disallowance of the transactions with the federal government. The Department also determined that the taxpayers did not present it sufficient documentation to establish that some income was attributable to exempt resale transactions. The Board upheld the Department's disallowance of resale transactions where there was not sufficient proof that such transactions occurred.
During an earlier audit period, the taxpayer paid sales tax under the retail classification. As a result of the audit at issue, the Department assessed additional tax under the mining classification and the taxpayer subsequently reported its tax liability under both the mining and retail classifications. The Department subsequently audited the taxpayer for a later period and claimed it was under reporting tax due under the mining classification. The taxpayer argued that it employed independent contractors to mine flagstone on its mineral claims and that it was these independent contractors, not the taxpayer, that engaged in mining or quarrying or producing the flagstone for sale. The Board disagreed. The taxpayer operated quarries in the Coconino National Forest, stone yards in Prescott, Tucson and Ashfork and a ready mix plant in Paulden. The taxpayer either leased mineral rights from private third parties or purchases mineral material through sales contracts with the federal government. The evidence shows that the taxpayer retained the rights and title to the flagstone during all phases of the process, directed, where, what and how much was extracted by either independent contractors or traditional employees, then processed the stone and sold it to a variety of customers. As a result, the Board concluded that the taxpayer is engaged in mining within the statutory definition. The Board also rejected the taxpayer's argument that the Department was estopped from collecting the tax at issue because of erroneous oral advice it received from a Department auditor during the earlier audit. It argued that it calculated its tax liability using a fixed rate of $25 per ton pursuant to oral instructions from the Department's auditor. However, there is no evidence to indicate that such a number was used in either the earlier or current audit in determining the taxpayer's liability. The taxpayer did not establish the key element of estoppel showing that the Department committed affirmative acts inconsistent with a position leader relied on, as established in Valencia Energy v. Ariz. Dep't of Rev., 154 Ariz. 539, 744 P.2d 451 (Ct. App. 1997).
The taxpayer was a contractor. It argued that it was paid less than the guaranteed maximum amount of which its customer had agreed to pay to it, yet the Department's tax assessment was based on the maximum amount. The Board held that the taxpayer did not have sufficient evidence of its business accounts to establish what had been paid for the construction work. The Taxpayer also argued that it was not liable for revenue attributable to reimbursement for third party services such as fees for building permits, soil reports, municipal fees and agricultural/engineering services, pursuant to State Tax Comm'n v. Holmes & Narver, Inc., 113 Ariz. 165, 548 P.2d 1162 (1976). The Board concluded that the taxpayer did not provide sufficient evidence to establish that the third party services were exempt under the three part test of Holmes and Narver.
Luther entered into contracts for the construction of school facilities on Indian reservations in Arizona. The Department determined that its income from these projects was subject to sales tax and issued assessments accordingly. The Board rejected the taxpayer's argument that the Arizona judicial authority on whether certain activities were taxable on Indian reservations was wrong. It also rejected the argument that Greenberg should only be applied prospectively based on its reliance on the contrary decisions in the U.S. Supreme Court of Ramah Navajo School Board v. Bureau of Revenue of New Mexico and the Board�s earlier decisions in Greenberg. The Board concluded that such reliance was unreasonable. Finally, the Board rejected the taxpayer's argument that the Department was estopped from collecting a tax issue because it had previously granted the taxpayer a refund for the same type of income it was now claiming to be taxable. It found that the Department workpapers accompanying the previous refund dealt with different legal issues. It also concluded that the workpapers did not rise to the level of formal state action to which estoppel applies. Finally, the Board held that the taxpayer did not suffer any detriment since it was only now required to pay taxes legitimately owed under the correct interpretation of the law.
Joel Kocher was granted nonqualified stock options to purchase stock from Dell Corporation as a benefit of his employment with Dell. When granted the options, he was a resident of Texas. He terminated his employment in 1994 and was not able to exercise his stock options at issue until 1995. The exercise of options was reported by Dell as compensation on the taxpayers 1995 W-2 which reflected Texas as a state in which the compensation was earned. The income was reported but subtracted on the taxpayers 1995 Arizona income tax return. A refund was granted for that year but the return was subsequently reviewed and an assessment issued for the refund, including interest and penalties. The taxpayers agreed that the proceeds from the exercise of the stock options were received in 1995 but contended that they were earned or accrued while employed by Dell and residents of Texas. They contended that the original subtraction of the exercise of the options was justified under A.R.S. � 43-1097.B which provides that during the tax years in which a taxpayer changes from a resident to a nonresident Arizona taxable income will include all income and deductions realized depending on the taxpayers method of account except income accrued by cash basis taxpayer prior to the time taxpayer became a resident of Arizona. The Board concluded that that provision only applied in the year a taxpayer changes from a nonresident to a resident and the taxpayers became Arizona residents in November 1994. Therefore, the provision did not apply and there was no other provision under Arizona law allowing the taxpayers to subtract the stock option compensation.
The taxpayers previously appealed the Department's determination that they were Arizona residents for 1993. The Board concluded that they were not and abated the Department's assessment of additional income tax, penalties and interest. The taxpayer subsequently applied for their attorney�s fees in that action which was denied by the Department�s Taxpayer Problem Resolution Officer. The Board concluded that the Department was substantially justified in concluding that the taxpayers were Arizona residents. While the Board ultimately determined that the taxpayers were not such residents, it held that the Department�s position had a reasonable basis in law and fact. It had based its position on several factors, including the fact that the taxpayers owned a house in Arizona and maintained Arizona driver�s licenses.
For 1998, the taxpayers filed their Arizona income tax return and reported a capital gain from the sale of property located in Washington. They subsequently amended that return by subtracting the capital gain and claiming a refund of the income tax paid. They argued that their payment of Washington property tax on the property relieved them of their obligation to pay income tax on the capital gain, relying on A.R.S. � 43-1071. The Board disagreed, concluding that A.R.S. � 43-1071 related only to income tax paid in other states, not property tax. Furthermore, under A.R.S. � 43-102.A.1, the amount of income reported to Arizona must be identical to the amount of adjusted gross income reported to the IRS.
The taxpayer made the same arguments as the Forrys above. The Board ruled against the taxpayer for the same reasons as it did the Forrys. Davis did not preclude the operation of the state�s statute of limitations or negate the procedural requirements which must be followed in order to receive a refund. The Board cited the Department's income tax ruling ITR 93-15 which held that only those federal retirees �who file timely amended returns, claims or refunds, or the protective claims for a refund included in the instructions to the 1989 income tax return� are entitled to relief.
The taxpayer, an Arizona resident, earned W-2 wages in 1993, 1994, 1995, but did not file Arizona income tax returns for those years. The Department assessed tax, interest and penalties for failure to file, failure to furnish information and negligence for the tax years at issue. The taxpayer subsequently submitted Arizona and federal income tax returns reporting a $0 federal adjusted gross income and the W-2 forms for 1993, 1994 and 1995. The Department allowed a credit for the Arizona withholding, modified the assessment accordingly and abated the penalty for failure to furnish information. However, the taxpayer continued to assert that he had not received the W-2 income, arguing that the W-2s, as well as some 1099s are �naked forms� which are not independent proof of receipt of income. The Board disagreed, holding that the W-2 and 1099 forms established that the taxpayer had received the respective income. It pointed out that the tax returns filed by the taxpayer claiming the withholding tax that was listed in the same forms.
The taxpayers filed an amended return for 1984 claiming a refund based on the U.S. Supreme Court decision in Davis v. Michigan Dep�t of Treasury, which held that an income tax exemption granted to a states own retirees but not to federal retirees violated the intergovernmental immunity doctrine at 4 U.S.C. � 111. The taxpayers subsequently sought a refund for the tax paid in 1985 through 1988. The Department accepted the amended 1984 return as a valid refund claim for 1984 but it could not locate any written refund claim for 1985 through 1988 from the taxpayers. The taxpayers contended that an employee of the Department advised them by telephone that filing the 1984 amended return would suffice as a refund claim for the years 1984 through 1988. The Board held that the taxpayers provided no evidence to support there assertion regarding the advice by the Department and, in any event, the Department cannot be bound by the erroneous oral advice of its employees. A.R.S. � 42-2052.B. Accordingly, the Board held that the 1984 amended return applied only to 1984 and that the Department properly denied any refunded claim for tax years 1985 through 1988.
The taxpayer filed a refund claim with the Department pursuant to Davis v. Michigan Department of Treasury, which held that an income tax exemption granted to a state�s own retirees but not to federal retirees violated the intergovernmental immunity doctrine at 4 U.S.C. � 111. The Department contended that Silbert's filing of a claim based on Davis for the years 1984 and 1985 in 1991 was outside of the applicable statutes of limitations. The Board agreed, claiming that the filing was outside of the four-year period of A.R.S. � 42-1106.A.
The taxpayer filed a refund claim with the Department pursuant to Davis v. Michigan Department of Treasury, which held that an income tax exemption granted to a state�s own retirees but not to federal retirees violated the intergovernmental immunity doctrine at 4 U.S.C. � 111. The Department contended that the Smelkinson's filing of a claim based on Davis for the years 1984 and 1985 in 1991 was outside of the applicable statutes of limitations. The Board agreed, claiming that the filing was outside of the four-year period of A.R.S. � 42-1106.A.
The taxpayers filed Arizona resident income tax returns from 1987-1992, and from 1994-1996. They filed a part-year resident Arizona income tax return and part-year California income tax return for 1993. They filed their 1993 federal income tax return using a Texas address. The Department determined that the taxpayers were Arizona residents for all of 1993, contending that they failed to establish an out-of-state domicile because they did not abandon their Arizona domicile. The taxpayers maintained Arizona drivers licenses, ownership of an Arizona home, and registered their vehicles in Arizona during 1993. The Board held that the taxpayers were not Arizona residents. In July of 1993, Mr. Madsen obtained employment in Texas with its expected duration to be five to eight years. They opened bank accounts, obtained credit cards and a bank loan in Texas, and purchased a mobile home where they were living in Texas. When Mr. Madsen�s employment was terminated in late 1993, when his job was unexpectedly eliminated, they sold the mobile home and moved to California where Mr. Madsen secured new employment. Their Arizona house had been occupied by their son or a grandchild since they moved to Texas and they did not immediately obtain Texas drivers licenses because their Arizona licenses had not expired. The Board concluded that the taxpayers� move to Texas, even though unexpectedly cut short, was not for a temporary or transitory purpose and that they had established a domicile in Texas, eliminating Arizona residency.
The Department determined that the taxpayer had filed federal income tax returns from an Arizona address for 1994 and 1995 but did not file any Arizona returns for these same years. In disputing the Department�s assessment of tax interest and penalty for 1994 and 1995, the taxpayer contended that his income during this time was attributable to retirement benefits not earned in Arizona and deposited in a Nevada bank. The Board disagreed, citing the specific Arizona statute stating that Arizona residents are subject to income tax upon their entire taxable income "wherever derived." A.R.S. � 43-104(A)(4). The Board also upheld the interest and penalty, concluding that interest is part of the tax and may not be abated if the tax is not abated and that the failure to file returns was not due to reasonable cause.
In an earlier decision, the Board held that the taxpayers were entitled to refunds of transaction privilege tax erroneously remitted to the Department under the amusement classification. The Board held that the taxpayers were entitled to a refund and the Department could not impose any conditions on granting that refund, including the requirement that the taxpayers return the refunded tax to the customers that actually paid it to the taxpayers. However, in this case, the Board held that the taxpayers were not entitled to their attorneys� and accountants� fees in pursuing the refund appeals. Under former A.R.S. � 42-139.14(A), taxpayers are entitled to their fees and costs incurred if the Department was not "substantially justified" in taking the position it did in the appeal. The Board determined that while the Department was wrong in its position on the taxpayers� refunds, it had a reasonable basis in law and fact for that position and was, thus, substantially justified in denying the refunds.
From 1990 through 1995, the taxpayer leased commercial property to a corporate entity in which he was an officer, director and majority shareholder. That corporation then leased one-half of the property to another corporation in which the taxpayer was an officer, director and majority shareholder. The taxpayer did not remit any transaction privilege tax to the Department during this time, and the Department determined that the taxpayer was in the business of leasing commercial property and assessed tax, interest and penalties accordingly. The taxpayer paid the tax but contended that the interest and penalties should be abated because he had reasonable cause for failing to file the appropriate returns, namely that he relied upon the advice of his CPA. The Department contended that reasonable cause only existed if the CPA was specifically asked about transaction privilege tax liability. The taxpayer originally submitted an affidavit stating that he specifically asked the CPA if the leasing was taxable, to which the CPA replied it was not. However, at the hearing before the Board, the taxpayer stated that he did not ask the CPA about the privilege tax liability until after the Department�s audit. The Board determined that the taxpayer�s conflicting statements under oath, as well as the lack of any other supporting evidence, demonstrated that his failure to pay transaction privilege tax was not based on the advice of his CPA. The Board also held that interest could not be abated because it was considered part of the applicable tax.
The Department determined there were discrepancies in the amounts of income reported on the taxpayer�s 1986 and 1987 federal and Arizona income tax returns. The Department made some adjustments and subsequently modified the assessment after the taxpayer provided additional information. The taxpayer appealed the modified assessment, contending that the tax liability at issue had been discharged in bankruptcy proceedings. The Board held that determining whether a tax liability has been discharged was in the jurisdiction of the bankruptcy court and not the Board. Furthermore, the taxpayer had not provided any evidence to the Board indicating that the Department�s assessment was erroneous. The Board also held that interest was part of the tax and could not be abated.
A-W was in the business of delivering packages by motor vehicle in Arizona. It did not register its vehicles with the Arizona Department of Transportation or pay motor carrier tax to it. The gross weight of each vehicle was not more than 12,000 pounds. A-W argued that it was subject to the state motor carrier tax A.R.S. � 28-1599.05(A) even though it did not pay any, and was exempt from transaction privilege taxation imposed on transporting property for hire. The Board rejected the taxpayer�s argument that the only reason that the motor carrier tax did not apply to vehicles weighing less than 12,000 pounds is because the legislature failed to provide a tax rate on such vehicles. The Board held that during the period at issue, the relevant statues made no reference at all to taxing vehicles less than 12,000 pounds. In addition, the legislature recently enacted a new motor carrier tax on vehicles weighing less than 12,000 pounds, indicating that no such tax existed previously.
Mr. and Mrs. Del Frari filed a refund claim with the Department based on Davis v. Michigan Department of Treasury. However, while that case involved the issue of federal retirees paying state income tax on their retirement benefits, the Del Frari's claimed involved state tax on their contributions to a federal retirement plan. The Del Fraris used the standard form prepared by the Department for the Davis issue, for the years 1984 through 1988. The Department granted the refund for 1984 through 1988, treating the taxpayers� claim as a contribution issue not a benefits issue. The Department denied refunds for 1989 and 1990 because the claim did not cover those years. The Board upheld the denial of the refund, rejecting the Del Fraris� argument that the statute of limitations for 1989 and 1990 was tolled because the Department�s form stated that the statute of limitations "for all other applicable years" could be stopped by following the form. The Board concluded that the form was confusing and ambiguous but that the form was technically for benefits, not contributions and made references to the pending litigation (Bohn v. Waddell) which addressed benefits. Thus, even though the Department granted the refunds for 1994 through 1998, the Board believed that the form was sufficiently inapplicable to the contributions issue in other years, precluding the Del Fraris from establishing a refund claim on the contributions issue for 1989 and 1990.
Flintco is a corporation owned by members of the Cherokee Nation in Oklahoma which engages in the business of prime contracting. It entered into a construction contract with the Tuba City Unified School District, a political subdivision of Arizona, located on the Navajo Reservation. The Department assessed Flintco transaction privilege tax under the prime contracting classification on its contracting income. The Board rejected Flintco�s argument that it was exempt from Arizona taxation because it was an Indian owned corporation. Numerous federal court decisions have held that a non member of the tribe for whom a reservation is established is subject to state taxation to the same extent as a non Indian. Flintco was a Cherokee owned contractor performing work on the Navajo Reservation. The Board also rejected Flintco�s argument that it was not subject to state taxation because it qualified under the Buy Indian Act at 25 USC � 47. The U.S. Supreme Court had stated in Arizona Department of Revenue v. Blaze Construction, that the Buy Indian Act was not evidence of congressional intent to bar state taxation of non member Indians on reservations other than their own.
AT&T appealed a transaction privilege tax assessment on sales of certain telecommunications equipment. On appeal, the Director of the Department agreed that some but not all of the equipment was exempt. AT&T appealed to the Board and, subsequently, the Department changed its position and withdrew the remainder of the assessment still at issue. AT&T subsequently applied for reimbursement of attorney�s fees expended during the Department and Board proceedings. The Department argued that AT&T was not entitled to any reimbursement because the Board had not decided the underlying substantive appeal on its merits. The Department contended that AT&T was not a "prevailing party" under the applicable law. The Board rejected the argument, claiming that AT&T achieved its goal in the case when the Department withdrew the remaining assessment. In a rare dissent, Board Chairman Steve Linzer dissented, concluding that AT&T was not a prevailing party for purposes of the fee reimbursement statute.
The Department assessed additional tax upon the taxpayer for failing to file a 1991 Arizona income tax return. The taxpayer argued that because the Department failed to rebut the affidavit he submitted to the Department, the facts of the affidavit, which supported his position, must be accepted as true. He cited two Arizona cases stating that uncontroverted statement of facts in support of a motion for summary judgment are presumed true. The Board concluded that the presumption does not apply to an affidavit submitted in administrative proceedings. In addition, the affidavit was executed by an interested party, the taxpayer, leaving the Department and Board free to determine its appropriate relevance and accuracy.
Mr. and Mrs. Schwartz failed to file Arizona income tax returns for 1992 and 1993. Mr. Schwartz subsequently conceded that he was an Arizona resident for 1992 and 1993, but argued that his wife�s wages should not be taxed during this period. The Board concluded that Arizona, as well as California, where Mrs. Schwartz was living, were community property states and that half of her total income was attributable to Mr. Schwartz and taxable in Arizona.
The taxpayers filed a joint 1994 Arizona income tax return which included a $2,500 subtraction attributable to the State of Arizona pension and comp pay to Mr. Raby. Subsequently, they filed an amended return claiming a $5,000 subtraction for the pension income. The Rabys contend that the pension income is community property and that Mr. and Mrs. Raby were each entitled to a $2,500.00 subtraction for the pension income received solely by Mr. Raby. The Department argued that only one person, Mr. Raby, received pension income and that the Rabys were only entitled to one subtraction of $2,500 per tax year. The Department followed its administrative regulation which provided that the $2,500 subtraction is calculated per individual. The Board rejected the Department�s position which essentially viewed the Rabys� marital community as a single individual, whereby property acquired during the marriage belongs neither to the husband nor the wife but to the community. Under earlier Arizona, as well as BOTA decisions, it was determined that, as co-owners of a pension, married individuals each receive the pension. Accordingly, the Rabys were each entitled to a $2,500 subtraction.
Using the same reasoning as discussed above in the Raby decision, the Board held that the taxpayers were entitled to a $5,000 subtraction from income for military pension payments.
In 1992, the IRS determined that the taxpayer was taxable as a corporation. This determination was upheld by the U.S. Tax Court. The Department subsequently audited the taxpayer when to failed to file Arizona corporate income tax returns for 1988 and 1999. Relying on the Tax Court decision, the Board rejected the taxpayer�s arguments that it was not taxable as a corporation. It also rejected the taxpayer�s argument that because the Department failed to rebut an affidavit submitted by its former trustee, the facts of the affidavit, which supported the taxpayer�s position, must be accepted as true. The Board determined that several Arizona Court of Appeals decisions, holding that undisputed facts in a statement of facts in support of a motion for summary are presumed true, do not apply to affidavits submitted in administrative hearings.
Desert Coffee provided coin-operated coffee brewing machines to businesses, which included the coffee, chocolate, cream, sugar and other condiments. It argued it was exempt from transaction privilege taxation under A.R.S. � 42-5102.A.3, which exempted retailers who sell food and do not provide any facilities for the consumption of food on the premises. The Board disagreed, holding that for an item to constitute food for transaction privilege tax purposes it must fall within the statutory definition. A.R.S. � 42-5103.3 defines food as any food item which is intended for home consumption. Furthermore, A.R.S. � 42-5106.C states that food, as defined, does not include food for consumption on the premises, and A.R.S. � 42-5101.4.e states that beverages sold in cups, glasses or containers are food for consumption on the premises. Because the coffee products are food for consumption on the premises and not for home consumption, they do not fall under the definition of food for transaction privilege tax purposes. The Board also rejected the argument that the coffee sales were exempt as sales of food from vending machines. Again, the exemption applied to sales of food and not to sales of food for consumption on the premises.
Blue Line Distributing contended that its utensils, equipment and replacement parts used to make pizza sold to Little Caesar's Pizza were equipment used directly in manufacturing and processing, and exempt from taxation. The Board held that Little Caesars took its ingredients and transformed them into pizza. Thus, its activities were an integrated series of operations which converted tangible personal property in a form different from which it was acquired, and transformed it into a different product with a distinctive character or use. Accordingly, the Board concluded that Little Caesars was engaged in processing and that much of the equipment sold to it by Blue Line was exempt. The Board concluded that dough cutters and bubble poppers were nonexempt hand tools.
The Department assessed use tax on four vehicles purchased from an Indian owned dealership where no privilege tax had been paid at the time of purchase. The Board rejected the taxpayers' argument that the imposition of use tax was an illegal interference with the commerce of an Indian owned business. In this case, there was no Indian owned business or Indian tribe that had been subject to tax, and thus, there was no Indian commerce being regulated. The assessed use tax was on the taxpayers' use of tangible property within the State of Arizona as provided under the applicable use tax statute.
The taxpayer filed a refund plan with the Department pursuant to Davis v. Michigan Department of Treasury, which held that an income tax exemption granted to a state's own retirees but not to federal retirees violated the intergovernmental immunity doctrine at 4 U.S.C. � 111. The Department contended that Johnston's filing of a claim based on Davis for the years 1984 and 1985 in 1991 was outside of the applicable statute of limitations. The Board agreed, claiming that the filing was outside of the four-year statute period of A.R.S. � 42-1106.A.
The taxpayer prevailed before the Board on the issue of whether of its leasing of billboards were exempt from the transaction privilege tax on commercial leasing of real property. The Board concluded that the billboards were personal property and exempt from tax. [See the substantive appeal of this case under RECENT TAX COURT DECISIONS.] In this case, the Board rejected the taxpayer's application for attorneys' fees, concluding that the Department was substantially justified in bringing the tax assessment. The Department had relied on several cases, holding that billboards were real property for property tax purposes.
The taxpayers received income from the sale of real property in Mexico, which was subject to a 20% Mexican withholding tax. They claimed a credit on their 1991 Arizona individual tax return for the tax paid to Mexico. The Department disallowed the credit and the Board affirmed this treatment. A.R.S. � 43-1071.A and related case law provide that residents shall be allowed a credit against taxes imposed for net income taxes paid to another country, and the Board held that net income tax means taxes which allow deductions from gross income. The Board concluded that the withholding tax paid by the taxpayers was imposed on the gross amount of the sale without any allowance for deductions.
The taxpayers deducted $14,500 from Arizona taxable income for withdrawal from a thrift savings plan sponsored by the federal government. The Board held that Arizona's starting point for calculating Arizona taxable income is federal adjusted gross income. Because there is no provision in the Arizona statutes allowing the taxpayers to lower their corresponding Arizona income by the amount of the thrift withdrawal, the Department appropriately added back that amount on to the taxpayers' Arizona return.
The taxpayers received income for services performed in Mexico for 1991, which was subject to Mexican withholding tax. They claimed a credit on their Arizona individual income tax return for those withholding taxes. The Department disallowed the credit. Unlike the Rosses, above, the taxpayers did not argue that the withholding tax was a net income tax but rather that the credit was permitted under recent amendments to A.R.S. � 42-1071.H, which changed the definition of net income tax to include taxes that qualify for a credit under �� 901 and 903 of the Internal Revenue Code. The Board rejected the argument that the amended definition applied for years prior to 1999, concluding that it was specifically made effective in 1999, and there is no other authority allowing its application to prior years.
The Department denied Western's refund claim for taxes paid under the amusement classification on its river rafting trips, because Western would not reimburse its customers for the refund received from the Department. The Board overruled the Department and held that Western was entitled to an unconditional refund. Former A.R.S. � 42-129 provided that refunds must be granted if owed and contained no limitations on such refunds. It also held that former A.R.S. � 42-1302.A addressed only exclusions from income, not refunds, and did not allow for any conditions on refunds.
Parcelway was a courier service business which had delivered packages and documents since 1991. In 1993, Parcelway acquired a company engaged in employee leasing. The Department determined that all of Parcelway's services, including those provided through the leasing company, were taxable under the transporting classification. Parcelway contended that the employee leasing business was a separate business from its courier service and not subject to tax, and the Board agreed. Under the long time authority of State Tax Comm'n v. Holmes & Narver, the Board concluded that income from the leasing company was readily ascertainable, the leasing company generated almost 60% of Parcelway's income during the audit period, and the leasing company's services were not integral to Parcelway's courier business of transporting for hire. While the leasing company provided its customers with personnel that could be used for deliveries, they performed various other tasks as well, such as picking up and sorting mail, collecting internal mail, stuffing mailers, setting up conference rooms, busing tables and making bank deposits. Accordingly, the leasing company was not subject to tax.
The taxpayer was a business league engaged in fund raising activities for its members and exempt from income tax under both the Internal Revenue Code and Arizona law. At various events, it sold items such as beer, wine, soda and T-shirts. It also collected gate and parking fees and made various items such as tables, chairs and tents available to exhibitors for a fee. The Department assessed additional tax on all of these activities under various transaction privilege tax classifications. The taxpayer contended that the fund raising activities of a nonprofit corporation could not constitute a business and, therefore, could not be subject to the transaction privilege tax. The Board rejected the argument, citing the broad definition of business under the transaction privilege tax, which included all activities personal and corporate, engaged in with the object of gain, benefit or advantage, either directly or indirectly. The Board concluded that the taxpayer had derived direct benefits, including the improvement of business in Tempe as well as promoting the interests of its members. The Board also rejected the argument that the taxpayer's activities were exempt casual activities, concluding that the frequency and regularity of its activity constituted business for transaction privilege tax purposes.
The taxpayer held title to an electrical generating station operated by Tucson Electric Power ("TEP"). TEP originally owned the generating station but refinanced in 1987 through a sale/leaseback transaction, with the taxpayer ultimately becoming the owner of the property and leasing it back to TEP. The Department contended that the lease portion of the transaction was taxable under the commercial leasing transaction privilege tax classification and issued an assessment on the unpaid amounts. The taxpayer argued that it was not in the business of leasing real property. It contended that former A.R.S. � 42-1301, which contained a broad definition of what constituted engaging in business, was an unconstitutional, irrebuttable presumption. The Board held that the business definition was not an irrebuttable presumption because it did not attempt enact into existence a fact that did not exist in actuality. Instead, it classified the taxpayer's activities of having some gain, benefit or advantage. The Board also rejected the taxpayer's argument that the sale/leaseback was a nontaxable refinancing mechanism, because the leaseback was in every legal sense a leasing of the property to TEP. The Board also rejected the argument that, even if a lease existed, it was real property not personal property. While many items of personal property can exist within a structure, the Board held the generating station was an improvement to real property.
The taxpayer filed no Arizona individual income tax returns for 1991 and 1992, although she filed federal returns from an Arizona address for those years. The taxpayer challenged the Department's assessment of tax penalties and interest, contending that she was not a resident of Arizona. The Board found that the taxpayer had continually resided in Arizona since 1987 and that her only ties to California, her purported state of residence, was the presence of her adult children and a 1985 divorce. By 1992, she had resided in Arizona for over four years, and her contention that she had not returned to California because of health concerns was not sufficient to overcome the general presumption of residency.

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