Calpine Const. Finance Co. v. Arizona Dept. of Revenue

• Decision Date: 16 April 2009
• Docket Number: No. 1 CA-TX 07-0012.,1 CA-TX 07-0012.
• Citation: 211 P.3d 1228,221 Ariz. 244
• Parties: CALPINE CONSTRUCTION FINANCE COMPANY, a Delaware limited liability partnership, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE; Mohave County, Defendants/Appellees.
• Court: Arizona Court of Appeals

211 P.3d 1228

221 Ariz. 244

CALPINE CONSTRUCTION FINANCE COMPANY, a Delaware limited liability partnership, Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF REVENUE; Mohave County, Defendants/Appellees.

No. 1 CA-TX 07-0012.

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

April 16, 2009.

Mooney Wright & Moore PLLC by Paul J. Mooney, Jim L. Wright, Mesa, Attorneys for Plaintiff/Appellant.

Sanders & Parks PC by Jay C. Jacobson, Phoenix, Attorneys for Defendants/Appellees.

OPINION

IRVINE, Judge.

¶ 1 Calpine Construction Finance Co. ("Calpine") appeals from a grant of summary judgment holding that Calpine must pay the Arizona property tax on improvements and personal property located at the South Point Energy Center ("Plant"), which is located on the Fort Mojave Indian Reservation. We hold that Calpine owns the improvements and personal property based upon the language in the lease agreement, Calpine's lack of rental obligations for the improvements, and its control over the removal or replacement of the improvements. Therefore, we affirm the judgment.

FACTS AND PROCEDURAL BACKGROUND

I. The Lease

¶ 2 Calpine and the Fort Mojave Indian Tribe ("Tribe") are parties to Lease No. 640-050-99 ("Lease") dated August 4, 1999. This document, approved by the Bureau of Indian Affairs, allows Calpine to lease trust land from the Tribe in order to construct and operate an electric power generating plant with related improvements. The Lease is for a 50-year term, with an option to extend.

¶ 3 The Lease document provides for the lease of raw land, not the improvements or personal property built by Calpine. The Lease specifically provides that "all buildings, improvements, fixtures, machinery and equipment of whatever nature at any time constructed, placed or maintained on any part of the Leased Land shall be the property of Calpine ...." (Emphasis added.) The Lease also states that "Calpine shall leave all Improvements in place on the Leased Land in good repair and in a safe condition" but may remove inventory and personal property located on the improvements or land at the expiration of 50 years or any earlier termination.

¶ 4 The Lease provides that if the Tribe were to take any property from Calpine in condemnation proceedings, any awards by the condemning authority would be distributed to Calpine, including the value of the land without improvements. If an entity other than the Tribe takes the land, the parties will allot the proceeds as follows: (1) to the Tribe for the value of the raw, unimproved land; (2) to Calpine for the improvements' value; (3) to the Tribe for the reversionary interest in the improvements; and (4) to Calpine for the value of the leasehold and the improvements.

¶ 5 The parties executed two modifications to the Lease. The first modification dealt with, among other things, a potential lawsuit in the event the Arizona Department of Revenue ("Department" or "ADOR") attempted to tax the power plant. The second modification, effective October 17, 2001, allowed Calpine to extend the Lease for another 15 years at the end of the 50-year term. It also authorized Calpine to remove or replace any improvements, without prior consent from the Tribe or the Secretary of the Interior ("Secretary"), in order to preserve the improvements' value should they become obsolete, defective, or worn out. This modification also noted that, on or about October 18, 2001, Calpine was in the process of completing a sale and leaseback of the improvements involving South Point Energy Center, LLC, and State Street Bank and Trust Co.

II. The District Court Litigation

¶ 6 The parties' litigation began in the United States District Court for the District of Arizona. In that forum, the Tribe sued the Director of ADOR to prevent the Department from assessing a property tax on the Plant's land and improvements. See Fort Mojave Indian Tribe v. Dir. of Ariz. Dep't of Revenue, No. CIV 02-1212-PCT-MHM (D.Ariz. Mar. 31, 2004). Calpine successfully moved to intervene and to join Mojave County ("County").

¶ 7 The County moved to dismiss Calpine based upon lack of subject matter jurisdiction under the Tax Injunction Act, 28 U.S.C. section 1341 (1948) (prohibiting district courts from enjoining an assessment, levy, or collection under state law when a plain, speedy, and efficient remedy is available in state court). The district court granted the motion. In turn, the Department brought a motion to dismiss the Tribe's complaint, based in part on the Tribe's lack of standing to challenge the relevant property tax statutes. The Department argued that Calpine, not the Tribe, owned the improvements, so no tax was imposed on the Tribe. The district court agreed, granted the motion to dismiss, and entered a final judgment against the Tribe and Calpine. Neither side appealed.

III. The State Court Litigation

¶ 8 While awaiting the district court's ruling, Calpine sued the Department and the County in the Arizona Tax Court pursuant to Arizona Revised Statutes ("A.R.S.") § 42-11005 (2006) to obtain a refund of illegally collected taxes. The Department filed a counterclaim on Calpine's failure to file annual reports with the Department for tax years 2003 and 2004 within the time set forth in A.R.S. § 42-14152(A) (2006) for paying applicable penalties. The Department sought penalties of $4900 for each of the tax years.

¶ 9 In its valuations, the Department attributed improvements and personal property at the Plant to Calpine, valuing them at $88,000,000 for the 2003 tax year and $122,876,000 for the 2004 tax year. The Department contends that its valuations do not include any property attributed to the Tribe, and cover only Calpine's property.

¶ 10 The parties filed cross-motions for summary judgment as to whether Calpine was liable for property taxes on the Plant improvements and on the counterclaim. In addition, the Department and the County moved to strike (1) Calpine's photograph of the Plant attached as an exhibit to its Combined Reply and Response, and (2) two memorandum decisions from this court attached to Calpine's motion for summary judgment.

¶ 11 The tax court denied Calpine's motion for summary judgment and granted all of the defendants' motions. The ensuing judgment, which includes stipulated language from the parties, specifies that the grant of summary judgment extends only to whether the improvements and personal property are subject to taxation, and not the amount of tax liability. Calpine appeals. We have jurisdiction pursuant to A.R.S. § 12-120.21 (2003).

DISCUSSION

¶ 12 We review de novo the tax court's grant of summary judgment. Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). Our review of statutory interpretation issues is also de novo. Univ. Med. Ctr. Corp. v. Ariz. Dep't of Revenue, 201 Ariz. 447, 450, ¶ 14, 36 P.3d 1217, 1220 (App.2001).¹

¶ 13 The Arizona Constitution states that all property in Arizona not exempt by law shall be taxed. Ariz. Const, art. 9, § 2(13); see also A.R.S. § 42-11002 (Supp.2008). The statutory exemptions, contained in A.R.S. §§ 42-11101 to -11133 (Supp.2008), do not refer to exemptions for power plant improvements and associated personal property. In 2000, however, the Legislature specifically provided that the Department must centrally value electrical generation facilities operating in Arizona. A.R.S. § 42-14151(A)(4) (2006); see also 2000 Ariz. Sess. Laws, ch. 384, §§ 1-3.

¶ 14 The Department determines the "valuation" of "all property, owned, or leased, and used by taxpayers in the following businesses: ... [o]peration of an electric generation facility." Id. The three components of electrical generation property—personal property, land, and real property improvements—are valued using different methodologies. A.R.S. § 42-14156(A)(1-3) (Supp. 2008). The Department valued only Calpine's personal property, but in accordance with the parties' stipulation, the state court ruling addressed both improvements and personal property. Personal property is "all tangible property except for land and real property improvements as defined in this section," A.R.S. § 42-14156(B)(2), and includes "foundations or supports for the machinery or apparatus for which they are provided, including water cooling towers." Id. Real property improvements are "buildings, including administration buildings, maintenance warehouses and guard shacks, water retention ponds, sewage treatment ponds, reservoirs, sidewalks, drives, curbs, parking lots, tunnels, duct banks, canals, fencing and landscaping." A.R.S. § 42-14156(B)(3).

¶ 15 The central issue of this case is whether Calpine or the Tribe owns the improvements. In general, a state cannot tax property located on a reservation that is owned by an Indian tribe or an individual Indian. Battese v. Apache County, 129 Ariz. 295, 296, 630 P.2d 1027, 1028 (1981); Pimalco, Inc. v. Maricopa County, 188 Ariz. 550, 555, 937 P.2d 1198, 1203 (App.1997). Property owned by a non-Indian, however, is taxable. Navajo County v. Peabody Coal Co., 23 Ariz.App. 259, 260, 532 P.2d 201, 202 (1975) (supplementing 23 Ariz.App. 101, 530 P.2d 1134 (1975)).

¶ 16 Ownership for property tax purposes signifies the "collection of rights to use and enjoy property, including [the] right to transmit it to others." Cutter Aviation, Inc. v. Ariz. Dep't of Revenue, 191 Ariz. 485, 490, 958 P.2d 1, 6 (App.1997). The general rule is that "a permanent structure placed upon and attached to the realty by a tenant is real property belonging to the lessor." Id. at 492, 958 P.2d at 8 (citing Maricopa County v. Novasic, 12 Ariz.App. 551, 553, 473 P.2d 476, 478 (1970)). In Novasic, however, we stated that an exception exists: the parties can abrogate the general rule that the lessor owns improvements built by the lessee by expressly agreeing to treat the improvements as belonging to the lessee. 12 Ariz. App. at 553, 473 P.2d at 478; see also 25 C.F.R. § 162.608 (200...