Aleasco, Inc. v. Maricopa County

• Decision Date: 07 January 1994
• Docket Number: No. TX,TX
• Citation: 177 Ariz. 291,867 P.2d 861
• Parties: ALEASCO, INC. v. MARICOPA COUNTY; Arizona Department of Revenue. 92-01751.
• Court: Arizona Tax Court

Page 861

867 P.2d 861

177 Ariz. 291

ALEASCO, INC. v. MARICOPA COUNTY; Arizona Department of Revenue.

No. TX 92-01751.

Tax Court of Arizona.

Jan. 7, 1994.

[177 Ariz. 293] Brown & Bain, P.A. by Craig W. Soland, Phoenix, for plaintiff.

Newmark Irvine Macpherson & Migray, P.A. by Francis Migray, Phoenix, for defendant Maricopa County.

Arizona Atty. Gen.'s Office by Michael F. Kempner, Phoenix, for defendant Arizona Dept. of Revenue.

OPINION

SCHAFER, Judge.

The main issue in this case is whether the county assessor may audit a taxpayer's prior years' personal property statements and assess taxes that were not paid because of the taxpayer's failure to properly report its property. If he may, there are further issues to answer: (1) may taxes be assessed for those years when the assessor did not demand the list of personal property provided for in A.R.S. § 42-222 but the taxpayer filed one anyway (though incorrect); (2) when personal property is exempt from sales tax may a sales tax nevertheless be imputed in determining the value of the property; and (3) what is the definition of "year of discovery" in A.R.S. § 42-236(D), which allows the assessor to recapture all escaped taxes for the three years preceding the discovery.

The taxpayer, Aleasco, Inc., rented construction equipment used in the construction of the Waddell Dam. It began business in Maricopa County in 1987 and hired Ralph Klein, a professional, experienced Arizona property tax consultant, to prepare and file its Arizona personal property tax statements. Mr. Klein prepared and filed personal property tax lists, Form 82520s, for tax years 1988 through 1991. The property lists for years 1988, 1989 and 1991 were voluntarily filed by Aleasco without a demand from the Maricopa County Assessor (the Assessor). Aleasco received a demand from the Assessor to file a list for tax year 1990. Each year Aleasco improperly reported its property for tax purposes by prorating only the depreciated cost of each item according to the number of days it was actually used on the job site during the year.

On October 25, 1990, and November 6, 1990, Dan McGuire, an auditor/appraiser for the Valuation Audit Division of the Assessor's office, visited the Waddell Dam site in order to determine whether any of Aleasco's property had not been reported for property tax purposes. On November 7, 1990, the Assessor sent an audit demand letter to Aleasco informing it of the Assessor's intention to audit Aleasco's property lists for the years 1987, 1988, 1989 and 1990. The letter also made a formal demand for all books and records containing information regarding Aleasco's property located in Maricopa County.

From November 1990 through April 1992, Mr. McGuire made several attempts to contact Mr. Gene Sacco, the individual Aleasco listed as the person to contact regarding the audit. ¹ Unsuccessful in his attempts to obtain the necessary information in Arizona, Mr. McGuire eventually conducted the audit May 27 through 29, 1992, in Washington. The audit was completed in August of 1992. The Assessor assessed, and Aleasco timely paid under protest, additional taxes of $606,926.87 for years 1988 through 1991, and penalties and interest of $861,836.16, for a total of $1,468,763.03. ² The tax portion of the assessment was based upon (1) the difference between the taxes paid on the prorated value of the assets and the taxes due on the value of the assets without any proration, and (2) the taxes on the value of assets either not included on the property lists or improperly listed as non-assessable motor vehicles.

Aleasco claims the Assessor had no authority to audit the prior years' property lists filed voluntarily and to impose additional taxes on property reported in those prior years. Alternatively, Aleasco argues that if the additional assessment is allowed to stand, the Assessor made several errors in calculating the amount of tax, penalties and interest due, and erred by including amounts from 1988 in the assessment. The Assessor ³ disagrees, arguing that it had authority to both audit the prior years' lists and to assess the taxes not paid, including those for 1988.

This Court agrees with the Assessor so far as the Assessor's authority to audit and assess past taxes, and as to the inclusion of 1988. However, the Court finds the Assessor erred in its imputation of sales tax into the valuation of certain equipment and in its imposition of certain penalties and interest. Additionally, the Assessor erred by including 1991 in the audit and additional assessment.

ANALYSIS

I. Authority to Audit and Assess Back Taxes

A. Authority to Audit

Section 42-223 gives the Assessor the power to audit.

Every list filed with the assessor may be subject to audit. Upon completion of an audit or upon discovery of property which has not been reported, any property found to have escaped taxation shall be liable for the amount of taxes due determined pursuant to § 42-236, subsection D, plus a penalty equal to ten per cent of such amount.

A.R.S. § 42-223(C) (emphasis added).

When interpreting a statute, this Court will first look at the language to be interpreted; when that language is clear the Court need look no further for guidance. Rio Rico Properties v. Santa Cruz County, 172 Ariz. 80, 834 P.2d 166 (1992). Here, the statute is clear.

Aleasco argues two things to show that the Assessor has no authority to audit past years' property lists and assess additional taxes. First, it relies on the Court of Appeals decision in In re Westward Look Development Corp., 138 Ariz. 88, 673 P.2d 26 (1983) for the proposition that "the Assessor may impose back taxes only where property has wholly escaped assessment and taxation in any amount." Aleasco argues Westward Look applies to personal property and therefore, bars any assessment of back taxes even where the taxpayer improperly reported its property resulting in an underpayment of taxes.

This Court need not decide whether Westward Look applies to personal property. Westward Look dealt with whether an assessor may correct its own omission or error by revaluing property and assessing taxes on improvements the assessor failed to value in prior years. That is not this case. This case involves an audit and additional assessment to remedy an omission or error by the taxpayer, not the assessor. Thus, Westward Look is inapposite.

Second, Aleasco argues an assessor's power to audit should not extend to those lists filed voluntarily without a request. But there is no support for such a limitation in the statutes. Section 42-223, subsection C, expressly allows the Assessor to audit "every list filed" with the Assessor. The only requirement is that the list have been filed. Here, Aleasco admits it filed property lists each year from 1988 through 1991. Consequently, the Assessor had authority to audit them.

B. Authority to Assess Back Taxes

Arizona's unsecured personal property tax scheme does not require self-reporting like the income tax scheme or privilege tax scheme. Tucson Mechanical Construction, Inc. v. Arizona Department of Revenue, 175 Ariz. 176, 177, 854 P.2d 1162, 1163 (App.1992); A.R.S. § 43-301. However, once the assessor requests a list of property or the taxpayer voluntarily files a list, there is a duty to correctly report all personal property subject to taxation. A.R.S. §§ 42-223(A), 236(A) and (D). Then, as previously noted, the Assessor has the power to audit any lists to ascertain whether property was correctly reported and that no property escaped taxation. A.R.S. § 42-223.

Once an audit is completed, and property is found to have escaped taxation, an assessor may collect back taxes in accordance with section 42-236(D) or (E). A.R.S. § 42-223(C). The applicable subsection here is D which provides:

Except as provided in subsection E any property found by the assessor to have escaped assessment in any year is liable for the taxes for the year in which the discovery was made and for any escaped taxes in the three years immediately preceding the year of discovery....

A.R.S. § 42-236(D).

Aleasco argues that once property has been listed and reported (at any value), and taxes assessed and paid, the property has not "escaped taxation." If that were correct a taxpayer could systematically undervalue its property, pay the taxes assessed on the improper value, and escape any liability for the proper amount of taxes. That is clearly not the design of the statutes.

Both sections 42-223(C) and 42-236(D) use the term "escaped" to define what property the assessor is looking for when performing an audit. The Compact Edition of the Oxford English Dictionary (1971) at page 893 defines the word "escape" as "to succeed in avoiding (anything painful or unwelcome)." Using that plain definition, when property is either undervalued by the taxpayer or not reported such property has "escaped" taxation since either the whole or a portion of its value succeeded in avoiding taxation.

Here, Aleasco improperly prorated the value of its personal property and reported the properties' values at only a portion of their true values. ⁴ For those days the equipment was not rented, no value was attributed to the equipment and therefore, no value was reported on Aleasco's property lists, causing a significant portion of the properties' values to be left unreported--and thus "escaped." The Assessor is entitled to assess back taxes on that portion which escaped taxation. In addition, Aleasco had items of property not listed at all or improperly listed as non-assessable. The Assessor is also entitled to assess back taxes on the value of those escaped items.

C. Year of Discovery

Once an assessor has determined that property has escaped taxation, taxes may be imposed for the year of discovery and back taxes may be imposed for "any escaped taxes in the three years immediately preceding the year of discovery." In determining the years for which back taxes may be imposed, the...