State ex rel. Dept. of Revenue v. Driggs

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

Page 1311

873 P.2d 1311

178 Ariz. 389

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

OPINION

SCHAFER, Judge.

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 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 Driggses to pay an additional assessment, plus interest, for tax year 1986. ¹

ANALYSIS

Estoppel requires: (1) affirmative actions or conduct inconsistent with a position later taken; (2) action by a party relying on such conduct; and (3) injury to the party resulting from a repudiation of such conduct. Decker v. Hendricks, 97 Ariz. 36, 396 P.2d 609 (1964); Dunn v. Progress Industries, Inc., 153 Ariz. 62, 734 P.2d 604 (App.1986).

It has long been the rule in Arizona that estoppel will be applied against the taxing authorities only in rare and unique circumstances. See e.g., Arizona Tax Commission v. Dairy & Consumers Cooperative Association, 70 Ariz. 7, 215 P.2d 235 (1950), Crane Company v. Arizona State Tax Commission, 63 Ariz. 426, 163 P.2d 656 (1945). However, estoppel against the Department was recently recognized as a viable defense to an additional assessment in Tucson Electric Power Company v. Arizona Department of Revenue, 174 Ariz. 507, 851 P.2d 132 (App.1993).

The taxpayer in Tucson was informed by a Department employee that certain certifications made by New Mexico officials would be sufficient to comply with the Arizona statute's certification requirements, thereby allowing the taxpayer to qualify for the accelerated depreciation deduction under former A.R.S. § 43-1030 relating to the installation of pollution control devices. The taxpayer took the deduction on its 1979, 1980 and 1981 income tax returns. The Department audited the taxpayer and disallowed the deduction. The Tucson court held (1) the taxpayer did not factually comply with the statutory requirements for the deduction, but (2) the Department was estopped to deny such noncompliance. Tucson Electric Power, 174 Ariz. at 513 and 517, 851 P.2d at 138 and 142.

Recognizing that estoppel is rarely found in tax cases, the Tucson court limited its holding by noting:

We have previously pointed out in this opinion a critical distinction between the situation presented in this case [where "the taxpayer is not relying upon estoppel to avoid the application of a taxing statute to activities contemplated by the statute"] and the situations presented in prior Arizona decisions that have refused to permit the application of estoppel against the taxing authorities. In those cases, the application of estoppel would have directly and substantially impinged upon the state's sovereign power to levy taxes, since the representations or conduct of the taxing authorities relied upon by the taxpayer related directly to whether the taxpayer's activities were taxable.

Id. at 516, 851 P.2d at 141. The Tucson court distinguished prior Arizona cases refusing to apply estoppel holding:

The representations of the Department of Revenue that the taxpayer relies upon for its estoppel argument were not that the taxpayer's activities were not taxable. Rather, they related solely to a procedural matter--the sufficiency of compliance by the taxpayer with the statute's certification requirements.

Id. at 515, 851 P.2d at 140. The court went on to state:

[C]onsideration should be given in each instance to the injustice that might...