Arizona State Tax Commission v. First Bank Bldg. Corp.

• Decision Date: 15 June 1967
• Docket Number: No. 1,CA-CIV,1
• Citation: 429 P.2d 481,5 Ariz.App. 594
• Parties: ARIZONA STATE TAX COMMISSION et al., Appellants and Cross-Appellees, v. FIRST BANK BUILDING CORPORATION, a corporation, Appellee and Cross-Appellant. 322.
• Court: Arizona Court of Appeals

Page 481

429 P.2d 481

5 Ariz.App. 594

ARIZONA STATE TAX COMMISSION et al., Appellants and Cross-Appellees, v. FIRST BANK BUILDING CORPORATION, a corporation, Appellee and Cross-Appellant.

No. 1 CA-CIV 322.

Court of Appeals of Arizona.

June 15, 1967.

Rehearing Denied July 31, 1967.

Review Denied Nov. 7, 1967.

Darrell F. Smith, Atty. Gen., James D. Winter and William T. Boutell, Jr., Asst. Attys. Gen., for appellants and cross-appellees.

Kramer, Roche, Burch, Streich & Cracchiolo, by Earl E. Weeks, Phoenix, for appellee and cross-appellant.

DONOFRIO, Judge.

This is an appeal by the Arizona State Tax Commission, hereafter called the commission, and a cross-appeal by First Bank Building Corporation, a corporation, hereafter called plaintiff, from a judgment awarding plaintiff the sum of $61,368.53 of the taxes which had been paid under protest, and awarding the commission the sum of $6,547.11 out of the taxes paid under protest.

The cause was submitted to the trial court on stipulated facts and exhibits furnished by the respective parties in connection with their motions for summary judgment. Inasmuch as the facts are undisputed, this Court is free to substitute its analysis of the record for the analysis of the trial court. Combustion Engineering v. Arizona State Tax Commission, 91 Ariz. 253, 371 P.2d 879 (1962); Goodyear Aircraft Corporation v. Arizona State Tax Commission, 1 Ariz.App. 302, 402 P.2d 423 (1965).

The commission had assessed the transaction privilege tax and educational excise tax, sometimes referred to as transaction privilege tax, against plaintiff with respect to certain rental proceeds under the authority of A.R.S. §§ 42--1309 and 42--1314. These proceeds were received in connection with the rental and use of several properties owned by it which will be treated in this opinion. The action concerns the validity of this tax assessment.

Plaintiff, First Bank Building Corporation, is a corporation duly organized and qualified to do business in Arizona and all of its capital stock issued and outstanding is held and owned by the First National Bank of Arizona a national banking association. The executive committee of the bank also serves as the board of directors of the plaintiff corporation and all its officers are also officers of the First National Bank of Arizona. Plaintiff employs no personnel and all bookkeeping with respect to its books and accounts is conducted by personnel of the bank. Plaintiff holds title to the First National Bank Building located at 411 N. Central Avenue, Phoenix; the First Nation Parking Garage adjoining it to the east on North First Street, Phoenix; buildings used as banks, and in some cases for other purposes, in Cottonwood, Miller Valley, Flagstaff, Williams and Prescott; a parking lot on North Third Street in Phoenix; the O'Connell Garage at First and Taylor Streets in Phoenix; and several residences.

The First National Bank Building is a nine-story structure with several passenger and service elevators. Both the building and the land on which it is situated are owned by the plaintiff corporation and leased to the First National Bank of Arizona on a year-to-year basis. The bank occupies approximately 48 percent of the building and the remainder is occupied by tenants who lease space from the First National Bank of Arizona for varying periods of time. Plaintiff pays all the real estate taxes assessed against the property. The insurance on the building is carred by the bank which is also responsible for all repairs, maintenance and operation of the building under the terms of a lease agreement between plaintiff and the bank. Plaintiff furnishes no services to the bank or to any other tenant of the building. The bank furnishes all janitorial service, elevator service and utilities to the occupants. No transaction privilege tax is paid to the commission on rents collected from the occupants of offices in the building on the basis that the bank is exempt as a National Banking Association.

The First National Parking Garage is a three-story structure occupying the one-half block to the east of this bank building and is owned by plaintiff which also leases it on a year-to-year basis to H & W Parking Service. The rental payments are based on a percentage of the income from the business. The building is used by H & W as an automobile parking garage and on this operation H & W pays taxes to the commission on the rentals received from parking. Plaintiff exercises no control over the parking service operation.

The building in Flagstaff, designed as a community bank office, consists of 7,605 square feet of floor space of which Arizona Public Service occupies 2,535 square feet, and the remainder is occupied by the Flagstaff branch of the First National Bank of Arizona. Arizona Public Service leases its portion from plaintiff on a ten-year lease, and upon expiration of the lease the bank contemplates occupying the entire building. Utilities, maintenance and janitorial services are paid by the tenants.

The building in Cottonwood is used exclusively as the Verde Valley office of the First National Bank of Arizona. The bank pays all utilities, maintenance and janitorial services with regard to this building.

The Williams building is leased to the bank and consists of 4,750 square feet, of which 240 square feet is subleased on a month-to-month basis to the Grand Canyon Chamber of Commerce. The remainder is occupied by the Williams branch of the bank. The record does not reveal who is landlord to the Chamber of Commerce. The bank pays for all utilities and janitorial services and plaintiff furnishes maintenance of the building.

The Prescott property was formerly the Bank of Arizona Building and was acquired by plaintiff in 1957. On the ground floor a beauty shop occupies 1,150 square feet, consisting of two rooms, and a title company occupies 2,550 square feet, consisting of four rooms. The balance of the ground floor is occupied by the Prescott Branch of the First National Bank of Arizona. A mezzanine in the building consists of an area of 1,750 square feet, of which 830 square feet is occupied by an accountant and the remainder is occupied by a lawyer. The second floor, consisting of 5,373 square feet is occupied by several tenants. First National Bank of Arizona furnishes water and janitorial services to itself and all of the rentals. Plaintiff furnishes heat, cooling and maintenance to the entire building. The tenants each furnish their own electricity. All tenants are leasing directly from plaintiff.

The building in Miller Valley has an area of 1,080 square feet, of which 590 square feet is occupied by an interior decorator and the remainder by the Miller Valley branch of the First National Bank of Arizona. The bank furnishes utilities, janitorial services and maintenance for itself and other occupants of the building.

Plaintiff owns several residences throughout the state, acquired solely for the purpose of providing housing for managers of the bank in remote areas.

Plaintiff also owns the building known as The O'Connell Garage located on the northwest corner of Taylor and First Streets, Phoenix. The bank leases from plaintiff and uses this building for parking and storing bank-owned automobiles, as well as automobiles of employees. No part of this building is open to the public for parking. The bank does sublet eight of the forty-eight parking spaces to its own employees at a rental of $12.00 per month.

Also used for automobile parking, plaintiff owns a lot on North Third Street, Phoenix. The land is fenced and used only by tenants and employees for their cars. Plaintiff is paid for parking spaces on a monthly basis.

The basis for charging rent on the properties of the plaintiff corporation at 411 N. Central Avenue, Phoenix, was arrived at by determining the life of the building for income tax purposes, which is in the neighborhood of fifty years, and then setting the amount of rent at a figure which would return to plaintiff its investment within that period of time plus a return of approximately 4 percent. The rent for the various offices is determined on a factor which combines size and location in the building. The rental for other property is based upon the same theory; i.e., a return to the plaintiff of its investment within the lifetime of the building and a return on the basis of 4 percent. In addition, the rental will vary upon factors such as the size of the space rented, the location of the space rented and the desirability of the accommodations furnished.

We have before us for determination several important questions, the first of which is whether plaintiff is exempt from the payment of transaction privilege taxes and educational excise taxes as a wholly owned subsidiary of the First National Bank of Arizona, a national banking institution.

Plaintiff urges that its ownership of the properties is solely for the benefit and convenience of the First National Bank of Arizona and that each of the properties has a direct relationship to the transacting of business by the bank. It cites O'Neil v. Valley National Bank of Phoenix, 58 Ariz. 539, 121 P.2d 646 (1942) which held that a national bank is exempt from taxation by the commission when it is the lessor of office space in a building, and contends that since plaintiff is a solely owned subsidiary of a national bank the same reasoning should be applied. In support it urges that it carries out vital functions of the bank in acquiring locations for branch offices and making available parking facilities and residences for its employees. To sustain the contention of this inter-governmental immunity, plaintiff cites the following from First National Bank in St. Louis v. State of Missouri, 263 U.S. 640, 656, 44 S.Ct. 213, 215, 68 L.Ed. 486 (1924):

"National banks are brought into existence under federal legislation, are instrumentalities of the federal government and are necessarily subject to...