Arizona Dept. of Revenue v. Raby

• Decision Date: 27 March 2003
• Docket Number: No. 1 CA-TX 01-0004.,1 CA-TX 01-0004.
• Citation: 65 P.3d 458,204 Ariz. 509
• Parties: ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. William L. RABY and Norma S. Raby, individually, and as husband and wife, Defendants-Appellants.
• Court: Arizona Court of Appeals

65 P.3d 458

204 Ariz. 509

ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellee, v. William L. RABY and Norma S. Raby, individually, and as husband and wife, Defendants-Appellants.

No. -0004.

Court of Appeals of Arizona, Division 1, Department T.

March 27, 2003.

Terry Goddard, Attorney General By Christine Cassetta, Lisa Wood, Assistant Attorney General, Phoenix, Attorneys for Plaintiff-Appellee.

Raby Law Office By Burgess J.W. Raby, Tempe, Attorneys for Defendants-Appellants.

OPINION

HALL, Judge.

¶ 1 William L. Raby and Norma S. Raby ("the Rabys") appeal from a summary judgment that dismissed their claim for a refund of Arizona individual income taxes attributable to a claimed subtraction that the Arizona Department of Revenue ("ADOR") disallowed in the Rabys' amended joint return for tax year 1994. The issue is whether the Rabys, who had equal community property interests in the sums that the Arizona State Retirement System ("Retirement System") paid as a result of Mr. Raby's retirement from state employment, were each entitled under Arizona Revised Statutes ("A.R.S.") section 43-1022(2)(b) (1994) to exclude $2,500.00 of those payments in computing their Arizona adjusted gross income for 1994. As did the tax court, we conclude that the Rabys were only entitled to one $2,500.00 subtraction. Accordingly, we affirm.

FACTS AND RELEVANT PROCEDURE

¶ 2 The relevant facts are not disputed. The Rabys were married and resided in Arizona at all times material to this appeal. All their income has been community income. Mrs. Raby has been a homemaker since 1957.

¶ 3 Mr. Raby taught at the University of Arizona from 1957 to 1970 except for a three-year hiatus beginning in 1960. Mr. Raby taught at Arizona State University from 1981 until his retirement in 1993. During Mr. Raby's entire period of employment at the Universities, the state withheld from his compensation certain sums calculated by law that were paid to the Retirement System on Mr. Raby's account along with matching sums funded by the state.

¶ 4 Upon Mr. Raby's retirement in 1993, the Rabys elected to receive from the Retirement System two 100 percent joint-and-survivor annuities relating to Mr. Raby's respective periods of service with the University of Arizona and Arizona State University. The Retirement System electronically deposits the annuity payments into the Rabys' community property bank account.

¶ 5 For 1994 the taxable total of these payments was $7,316.58. In their joint Arizona individual income tax return for 1994, the Rabys claimed a single exclusion of $2,500.00 from their Retirement System annuity payments and calculated their Arizona individual income tax liability accordingly. In an amended return filed April 14, 1999, however, the Rabys claimed a refund of $160.00 for tax year 1994 on the theory that they had actually been entitled to two exclusions of $2,500.00 each.

¶ 6 ADOR disallowed the refund claim. ADOR's hearing officer denied the Rabys' resulting protest. The Rabys appealed to the Arizona State Board of Tax Appeals ("the Board"). The Board vacated ADOR's final order and determined that the Rabys were each entitled to an exclusion of $2,500.00 for tax year 1994, for a total of $5,000.00.

¶ 7 ADOR appealed the Board's order to the tax court pursuant to A.R.S. § 42-1254 (1999). On cross-motions for summary judgment the tax court ruled for ADOR. The court determined that even though the Retirement System annuity payments constituted community property, only Mr. Raby "received" them within the meaning of A.R.S. § 43-1022(2)(b). From formal judgment, the Rabys appeal. We have jurisdiction. A.R.S. § 12-2101(B) (1994).

ANALYSIS

¶ 8 Arizona imposes an annual charge on the income of every resident of the state, commonly known as an income tax. See generally A.R.S. §§ 43-1001 to -1090.01 (1998 and Supp.2002). The tax is calculated as a specified percentage of each taxpayer's "taxable income." A.R.S. §§ 43-1011 to -1012 (Supp.2002).

¶ 9 The process of calculating an Arizona resident's taxable income begins with his or her "Arizona gross income." A resident individual's Arizona gross income is defined as his or her "federal adjusted gross income for the taxable year, computed pursuant to the internal revenue code." A.R.S. § 43-1001(2) (Supp.2002). This figure is then modified using the applicable additions and subtractions provided by A.R.S. §§ 43-1021 to -1022 (1994) to yield the taxpayer's "Arizona adjusted gross income." A.R.S. § 43-1001(1). "Taxable income" is derived by reducing this figure by any applicable deductions or exemptions provided by A.R.S. §§ 43-1041 to -1043 (Supp.2002). The taxpayer's ultimate liability is calculated by applying A.R.S. § 43-1011 (percentage scales) or § 43-1012 (optional tax table) and reducing the result by any credits to which the taxpayer may be entitled under A.R.S. §§ 43-1071 to -1090.01 (1998 and Supp.2002).

¶ 10 Section 43-1022(2)(b), Arizona Revised Statutes, provides one of the "subtractions" from Arizona gross income that may apply in the process of calculating Arizona adjusted gross income:

In computing Arizona adjusted gross income, the following amounts shall be subtracted from Arizona gross income:

....

2. Benefits, annuities and pensions in an amount totaling not more than two thousand five hundred dollars received from one or more of the following:

....

(b) The state retirement system....

¶ 11 The Rabys' fundamental thesis on appeal is that by virtue of Arizona's community property laws, see A.R.S. §§ 25-211, -213, -214, -215, -217 (2000), any sum that the Retirement System pays to one spouse is "received" by both spouses in equal halves. Therefore, the Rabys argue, the entire half "received" by each spouse up to a maximum of $2,500.00 may be subtracted from the Arizona gross income of each in calculating Arizona adjusted gross income. The Rabys conclude that because they reported their annual income in a joint return, they were entitled to subtract $5,000.00 under § 43-1022(2)(b) rather than the $2,500.00 they originally claimed.

¶ 12 ADOR points out, however, that Mr. Raby, as payee of the pension plan, is the spouse on whose account the sums are paid. See, e.g., A.R.S. § 38-757(B) (2001) (providing that "a member who meets the requirements... shall receive a monthly life annuity") (emphasis supplied). Thus, according to ADOR, he actually "receives" the annuity payments in the manner contemplated by § 43-1022(2)(b).

¶ 13 We have no quarrel with the Rabys' contention that Mr. Raby's retirement benefits are a form of deferred compensation acquired during the Rabys' marriage, see Koelsch v. Koelsch, 148 Ariz. 176, 181, 713 P.2d 1234, 1239 (1986),

and that Mrs. Raby therefore has a proprietary interest in the benefits equal to that of her husband, Ellsworth v. Ellsworth, 5 Ariz.App. 89, 92, 423 P.2d 364, 367 (1967). The question before us, however, is not truly one of community property law. Rather, it is one of state tax law.

¶ 14 To resolve this matter, we must determine the scope intended by the legislature for the subtraction provided by § 43-1022(2)(b). "The primary rule of statutory construction is to find and give effect to legislative intent." Mail Boxes, Etc. v. Indus. Comm'n of Ariz., 181 Ariz. 119, 121, 888 P.2d 777, 779 (1995). "To determine intent, we look first at the language of the statute and give the words used their ordinary meaning." Davis v. Ariz. Dep't of Revenue, 197 Ariz. 527, 529, ¶ 9, 4 P.3d 1070, 1072 (App.2000).

¶ 15 We find that the language of § 43-1022(2)(b) is susceptible to different interpretations. For example, when the statute is applied to a married couple to whom a state governmental payor has made payments on only one spouse's account, one could conclude, as do the Rabys, that each spouse "receives" half of every payment within the meaning of § 43-1022(2)(b) when, as here, the sums paid represent a property right acquired entirely during the marriage. However, based on the statutory language alone, one could also reasonably conclude, as does ADOR, that the retirement payments are received by the member spouse for the benefit of the community. The statute is thus ambiguous. See Hayes v. Continental Ins. Co., 178 Ariz. 264, 268, 872 P.2d 668, 672 (1994)

(ambiguity exists in statute if meaning or interpretation of statute's terms is uncertain). In construing an ambiguous statute, we consider the statute as a whole and attempt to give it a fair and sensible meaning while avoiding a construction that produces an absurd result. Knight Transp., Inc. v. Ariz. Dep't of Transp., 203 Ariz. 447, 452, ¶ 22, 55 P.3d 790, 795 (App.2002).

¶ 16 We begin our analysis by noting that tax deductions, subtractions, exemptions, and credits are to be strictly construed. See Ebasco Servs., Inc. v. Ariz. State Tax Comm'n, 105 Ariz. 94, 99, 459 P.2d 719, 724 (1969)

(deductions) (relying on general rule that "every interpretation shall be against exemptions from taxing statutes") (quoting J.H. Welsh & Son Contracting Co. v. Ariz. State Tax Comm'n, 4 Ariz.App. 398, 403, 420 P.2d 970, 975 (1966)); Davis, 197 Ariz. at 529-30, ¶ 12, 4 P.3d at 1072-73 (credits).

¶ 17 Two additional rules of construction guide our analysis. First, although an administrative agency's interpretation of a statute that it enforces does not bind the courts, a reviewing court generally accords "great weight" to the agency's construction. See Marlar v. State, 136 Ariz. 404, 411, 666 P.2d 504, 511 (App.1983)

; Davis, 197 Ariz. at 530, ¶ 14, 4 P.3d at 1073. Second, the construction that an agency places on a statute it administers, if acquiesced in for a long period of time, will not be disturbed unless manifestly erroneous. Industrial Comm'n v. Harbor Ins. Co., 104 Ariz. 73, 76, 449 P.2d 1, 4 (1968); State ex rel. Ariz. Dep't of Revenue v. Magma Copper Co., 138 Ariz. 322, 326, 674 P.2d 876, 880 (App.1983). See State ex rel. Ariz. Dep't of Revenue v. Short, 192 Ariz. 322, 324-25, ¶ 13, 965...