Arizona Joint Venture v. ADOR

• Decision Date: 17 December 2002
• Docket Number: No. 1 CA-TX-02-0010.,1 CA-TX-02-0010.
• Citation: 66 P.3d 771,205 Ariz. 50
• Parties: ARIZONA JOINT VENTURE, an Arizona partnership, and North Scottsdale Joint Venture, an Arizona partnership, Plaintiffs-Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee.
• Court: Arizona Court of Appeals

66 P.3d 771

205 Ariz. 50

ARIZONA JOINT VENTURE, an Arizona partnership, and North Scottsdale Joint Venture, an Arizona partnership, Plaintiffs-Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 1 CA-TX-02-0010.

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

December 17, 2002.

As Amended February 24, 2003.

Daniel T. Garrett LLC By Daniel T. Garrett, Mesa, Attorneys for Plaintiffs-Appellants.

Janet Napolitano, Attorney General By Sara D. Branscum, Assistant Attorney General, Phoenix, Attorneys for Defendant-Appellee.

OPINION

TIMMER, Presiding Judge.

¶ 1 The Arizona Department of Revenue ("ADOR") audited the records of Arizona Joint Venture and North Scottsdale Joint Venture ("taxpayers") pertaining to their prime contracting transaction privilege tax liability for the periods September 1993 through July 1997 and December 1994 through August 1997, respectively ("the audit period"). ADOR accepted the taxpayers' protests to the initial audit assessments and adjusted them accordingly, at the same time reducing certain land-value deductions that its initial audit had left undisturbed. The taxpayers disagreed with these adjustments. They exhausted their administrative remedies and brought this appeal action in the tax court. The tax court sustained ADOR's final audit assessments. The taxpayers now appeal. They urge these issues:

1. Whether ADOR lacked statutory authority to adjust the taxpayers' land-value deductions;

2. Whether ADOR's land-value deduction adjustments constituted invalid deficiency assessments because they were made without using the proper ADOR form and were barred by the statutory limitations period established by Arizona Revised Statutes ("A.R.S.") sections 42-1104(A) (1999 & Supp.2002) and 42-1108(A) (1999);

3. Whether ADOR's prior conduct estopped it from reducing the taxpayers' land-value deductions or to require the taxpayers to substantiate them; and

4. Whether the tax court should have required ADOR to prove that the taxpayers' land-value deductions were overstated.

We have jurisdiction pursuant to A.R.S. §§ 12-2101(B) (1994) and 42-1254(D)(5) (Supp.2002).

FACTS AND PROCEDURE BELOW

¶ 2 At all times material to this case the taxpayers were controlled by the same management group. Both engaged in the business of prime contracting in Arizona by building condominium developments and selling condominiums for residential use. They were therefore subject to the transaction privilege tax on that business imposed by A.R.S. §§ 42-5008(A) (1999 & Supp.2002) and 42-5075 (1999 & Supp.2002) (formerly A.R.S. §§ 42-1309 and 42-1310.16, respectively).

¶ 3 The tax base under the prime contracting classification is sixty-five percent of the taxpayer's gross proceeds of sales or gross income from the business less specified deductions, including "[t]he sales price of land, which shall not exceed the fair market value." A.R.S. § 42-5075(B)(1). From January 1982 through July 1997 appellant Arizona Joint Venture has consistently claimed land-value deductions of thirty percent of gross proceeds of sales. In three earlier audits of Arizona Joint Venture, ADOR either accepted or refrained from challenging its thirty percent land-value deductions. During the audit period now at issue, both taxpayers computed their land-value deductions at thirty percent of gross proceeds of sales.

¶ 4 The taxpayers each hired other contractors to construct streets, curbs, sidewalks, and utility lines for their condominium developments. The taxpayers certified to these contractors in writing that the taxpayers were the prime contractors who were liable for transaction privilege taxes on the jobs in question. See A.R.S. § 42-5075(E).

¶ 5 ADOR audited the taxpayers. It determined initially that the contractors whom the taxpayers had engaged to build streets, curbs, sidewalks, and utility lines had themselves been acting as prime contractors and had thus been liable for taxation on the amounts that the taxpayers had paid them. ADOR found that the taxpayers had been mistaken in giving exemption certificates to these contractors, and that under A.R.S. § 42-5075(E), the taxpayers were liable as a matter of law for the taxes that the contractors otherwise would have paid.

¶ 6 ADOR's auditor also believed that the thirty percent land-value deductions that the taxpayers claimed were greater than fair market value and unsubstantiated. The auditor requested documentation to support the amounts claimed. The taxpayers supplied none. The ADOR audit manager and audit supervisor nevertheless ultimately determined that the thirty percent land-value deductions were acceptable.

¶ 7 In February 1999, ADOR issued deficiency assessment notices to the taxpayers under A.R.S. § 42-1108(A). These assessments were based strictly on ADOR's finding that the taxpayers were liable under A.R.S. § 42-5075(E) for the prime contracting taxes that their outside contractors would have paid but for the exemption certificates that the taxpayers gave them. No part of the assessments was based on any failure of the taxpayers to properly report or pay tax on their own gross proceeds of sales from prime contracting, or on any overstatement of deductions or credits.

¶ 8 The taxpayers protested the assessments. The taxpayers explained to ADOR:

On-site contracting is contracting performed on the land that is being sold to the buyer. Off-site contracting is contracting performed on land that is not being sold to the buyer. Off-site contracting typically comprises streets, curbs, sidewalks and utilities. These are typically not sold to the purchaser but are deeded to a municipality or other governmental entity.

Off-site contracting may also comprise common area parks, pools, or other structures transferred to a home owners' association. These common areas are usually not sold to the purchaser but are deeded to the home owners' association.

However, here, everything is sold to the purchasers. The entire project is on-site! Even the streets, curbs, sidewalks and utilities are sold to the individual purchasers of the condominiums. There is no off-site contracting. All land and the construction thereon is sold to the buyers of the condominiums. To do otherwise would violate the Declaration of Condominium and State law.

Letter of May 11, 1999.

¶ 9 After an informal conference at which taxpayer North Scottsdale Joint Venture provided additional information, ADOR issued an amended proposed assessment that significantly reduced the additional tax amount determined to be due from it. ADOR nevertheless rejected the legal position set forth in the taxpayers' letter of May 11, 1999. The taxpayers requested a formal hearing.

¶ 10 On April 27, 2000, ADOR asked the taxpayers to provide information concerning their purchases of the lands at issue. ADOR explained that this information would assist it in evaluating the correctness of the taxpayers' thirty percent land-value deductions. On June 13, 2000, North Scottsdale Joint Venture provided ADOR with a Buyers Closing Statement for its land purchase. The record contains no evidence that Arizona Joint Venture provided any similar documentation.

¶ 11 On June 5, 2000, ADOR informed the taxpayers' counsel in writing that it was now accepting the taxpayers' contention that they had acted as prime contractors with respect to all construction on the condominium development sites with which the audit was concerned, including construction of the "off-site" improvements by the taxpayers' outside contractors. ADOR's letter also explained that its original assessments had been calculated on the assumption that the taxpayers' land deductions of thirty percent of gross proceeds of sales were "determined by the value of developed land sold to the condominium owners." Because ADOR was now accepting the taxpayers' theory concerning the nature of their business activities during the audit period, ADOR informed the taxpayers that it had recalculated their tax liabilities for the audit period to conform with their legal position and to "properly determine the amount of tax deficiency. . . ." ADOR stated:

These calculations include removing the amounts that were considered "off-site" and allowing a proper land deduction. Because Taxpayers were the prime contractors for the development of the common areas, the land deduction should equal the sales price of the undeveloped land. A.R.S. § 42-1310.16(B)(1). Because Taxpayers have not provided any documentation as to the sales price of the undeveloped land, the Division has calculated the land deduction at the standard 20% of the sales price of the condominiums.

. . . [U]nder A.R.S. § 42-2059(B), the Division is prohibited from increasing originally assessed amounts in subsequent amendments. Therefore, Taxpayers' tax liabilities remain at the original assessed amounts.

¶ 12 A formal hearing on the taxpayers' protests was conducted on October 5, 2000, before a hearing officer with the Office of Administrative Hearings. The hearing officer issued a decision upholding ADOR's assessments and denying the taxpayers' protests. The taxpayers filed separate complaints/notices of appeal in the tax court. See A.R.S. § 42-1254(C); Ariz. Admin. Code ("A.A.C.") R15-10-131(A) and R15-10-132(A).

¶ 13 The tax court consolidated the two actions. On cross-motions for summary judgment, the tax court ruled for ADOR. From formal judgment, the taxpayers timely appealed.

STANDARD OF REVIEW

¶ 14 On an appeal from summary judgment in which the material facts are not in dispute, the appellate court is to determine de novo whether the trial court correctly applied the substantive law to those facts. Brink Elec. Constr. Co. v. Arizona Dep't of Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App.1995).

ANALYSIS

1. Estoppel Against ADOR

¶ 15 Before ADOR and the tax court, the taxpayers contended that ADOR's prior acceptance of or failure to challenge taxpayer Arizona Joint Venture's thirty percent...