873 P.2d 1311 (Ariz.Tax 1994), TX 92-00972, State ex rel. Dept. of Revenue v. Driggs

Docket Nº:TX 92-00972.
Citation:873 P.2d 1311, 178 Ariz. 389
Party Name:STATE of Arizona, ex rel., Arizona DEPARTMENT OF REVENUE v. John D. and Gail D. DRIGGS.
Case Date:May 02, 1994
Court:Tax Court of Arizona

Page 1311

873 P.2d 1311 (Ariz.Tax 1994)

178 Ariz. 389

STATE of Arizona, ex rel., Arizona DEPARTMENT OF REVENUE


John D. and Gail D. DRIGGS.

No. TX 92-00972.

Tax Court of Arizona.

May 2, 1994

Mary H. DeLaat, Atty. Gen., Phoenix, for plaintiff.

Stephen C. Newmark, Phoenix, for defendant.



In 1986, John and Gail Driggs filed an income tax return with the Arizona Department of Revenue. As part of their income that year the Driggses had received Arizona corporate dividend income which they reported on the Arizona income tax return. Also on their return, the Driggses, following the Department's tax forms and instructions, computed and took a subtraction for federal income tax paid. Everyone now agrees that the form and instructions were incorrect. The Department now wants to correct its mistake and collect the taxes it should have collected.

The facts are not in dispute. According to the Department's 1986 Arizona income tax instruction booklet, proration of the federal income tax subtraction begins with federal adjusted gross income (FAGI). Specific items of income subtracted from FAGI on the return are also subtracted from FAGI for proration purposes. The net amount is divided by FAGI. The result is the percentage of federal income tax paid during the year which is allowable as a subtraction from Arizona gross income. Unfortunately, the instructions

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[178 Ariz. 390] for the 1986 income tax forms did not indicate that Arizona corporate dividend income should be subtracted in the worksheet computation. No line was provided for subtraction of this dividend income; not even a line for an "other subtraction" adjustment was provided.

The Department admits that nowhere in the 1986 forms or instructions were the Driggses (or the hundreds of other taxpayers using the forms) instructed to prorate Arizona corporate dividend income when determining the amount of the subtraction for federal income tax paid. In fact, none of the forms for tax years 1975 through 1988, a fourteen-year period, indicated that any adjustments were required to be made to the federal income tax paid figure to account for Arizona corporate dividend income.

It is the Department's contention that because the Driggses did not adjust the amount of federal tax paid to reflect the receipt of the Arizona corporate dividend income which was not taxable by Arizona, the subtraction was too large, resulting in the Driggses paying too little in taxes. The Driggses contend that because they calculated the federal tax paid subtraction in accordance with the Department's forms and instructions, the Department is estopped to argue the forms and instructions were wrong and to require the...

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