First Data Corp. v. Ariz. Dep't of Revenue
| Citation | 313 P.3d 548,233 Ariz. 405,674 Ariz. Adv. Rep. 41 |
| Decision Date | 26 November 2013 |
| Docket Number | No. 1 CA–TX 11–0008.,1 CA–TX 11–0008. |
| Parties | FIRST DATA CORPORATION; 440 Insurance Agency of Massachusetts, Inc.; 440 Insurance Agency, Inc.; Actuarial Computer Technology, Inc.; American Rapid Corporation; Applied Mailing Systems, Inc.; Atlantic Bankcard Properties Corporation; Atlantic States Bankcard, Inc.; B1 Pt Services, Inc.; Bankcard Investigative Group, Inc.; Basin Finance Company; Business Office Services, Inc.; Callteleservices, Inc.; Cashtax, Inc.; Cesi Holdings, Inc.; Credit Performance, Inc.; Dabco Computer Services, Inc.; DM Holdings, Inc.; Donnelley Funding, Inc.; Donnelley Marketing Consumer Promotions, Inc.; Donnelley Marketing Holdings, Inc.; Donnelley Marketing, Inc.; Eastern States Monetary Services, Inc.; EBP Life Insurance Company; FDC International, Inc.; FDC International Partner, Inc.; FDMS/UMS Partner, Inc.; FDR Interactive Technologies Corporation; FDR Ireland Limited; FDR Limited; FDR Missouri, Inc.; FDR Signet, Inc.; FDWYCO, Inc.; First Data Capital, Inc.; First Data Communications Corporation; First Data Digital Certificates, Inc.; First Data Distributors, Inc.; First Data Information Management Group, Inc.; First Data Integrated Services, Inc.; First Data Investor Services Group, Inc.; First Data Latin America Inc.; First Data Merchant Services Corporation; First Data Pittsburg Alliance Partner, Inc.; First Data Pos, Inc.; First Data Resources Canada, Inc.; First Data Resources, Inc.; First Data Services, Inc.; First Data Technologies, Inc.; First Data Tennessee, Inc.; First Financial Bank; First Financial Management Corporation; FSM Services, Inc.; Hogan Information Services Company; Innovis Data Solutions, Inc.; Integrated Payment Systems, Inc.; International Banking Technologies, Inc.; IPS Card Solutions, Inc.; IPS Holdings, Inc.; IPS, Inc.; NA Insurance Services, Inc.; NT Distributors, Inc.; Orlandi Valuta, Inc.; Orlandi Valuta 2 Nacional, Inc.; Pension Marketing, Inc.; Shared Global Systems, Inc.; Southern Telecheck, Inc.; Technology Solutions International, Inc.; Telecheck Holdings, Inc.; Telecheck International, Inc.; Telecheck Pittsburg/West Virginia, Inc.; Telecheck Recovery Services, Inc.; Telecheck Services, Inc.; Telecheck Services Canada, Inc.; Telecheck Services of Puerto Rico, Inc.; United States Pension Services, Inc.; Western Union Communications, Inc.; Western Union Financial Services, Inc.; Western Union Financial Services Eastern Europe, Ltd.; Western Union Holdings, Inc.; Western Union Industrial Bank, Plaintiffs/Appellants, v. ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee. |
| Court | Court of Appeals of Arizona |
OPINION TEXT STARTS HERE
Steptoe & Johnson, LLP By Pat Derdenger, Bennett Evan Cooper, Phoenix, Counsel for Plaintiffs/Appellants.
First Data Corporation and Its Combined Subsidiaries Arizona Attorney General's Office By Kimberly Cygan, Phoenix, Counsel for Defendant/Appellee.
Bade Baskin Richards, PLC, By William A. Richards and Multistate Tax Commission, Washington, D.C. By Shirley Sicilian, Burce J. Fort, Tempe, Counsel for Amicus Curiae Multistate Tax Commission.
¶ 1 First Data Corporation (“Taxpayer”) challenges the Arizona Tax Court's holding that gains from the sale of a wholly-owned subsidiary are business income on its Arizona combined income tax return. Taxpayer challenges the interpretation of “business income” adopted by the Arizona Department of Revenue (“Department”) and the tax court. We resolved a related issue presented in Harris Corp. v. Ariz. Dep't of Revenue, 233 Ariz. 377, 312 P.3d 1143 (App.2013) concerning the interpretation of the “business income” definition under Arizona Revised Statutes (“A.R.S.”) section 43–1131(1). Taxpayer also contends that the tax court erroneously failed to give effect to the parties' election under 26 U.S.C. (“I.R.C.”) § 338(h)(10). We disagree with Taxpayer's arguments, and we affirm the tax court's judgment.
¶ 2 Taxpayer is a Delaware corporation that maintains its corporate headquarters and domicile in Atlanta, Georgia. Taxpayer provides its customers with electronic payment services.
¶ 3 Taxpayer's wholly owned subsidiary, First Data Investor Services Group (“FDISG”), was a Massachusetts corporation with its headquarters in Massachusetts and operations in Minnesota, North Carolina, and Pennsylvania. FDISG provided processing services, which included transfer-agent services; fund administration; fulfillment and proxy services; and retirement-account record-keeping, and transaction services. FDISG focused on services for mutual funds, which Taxpayer characterizes as “not consistent” with Taxpayer's overall objectives.
¶ 4 In 1999, Taxpayer sold FDISG's stock to PNC Bank Corporation (“PNC”) and realized net proceeds of approximately $725 million. Taxpayer and PNC elected to treat the sale of FDISG stock as a sale of assets by FDISG in accordance with I.R.C. § 338(h)(10). For purposes of federal income tax, FDISG was deemed to have undergone a complete corporate liquidation with the distribution of the proceeds to its sole shareholder, Taxpayer. FDISG reported the gain on its federal income tax return.
¶ 5 Taxpayer, FDISG, and other Taxpayer subsidiaries constituted a unitary business and filed an Arizona combined corporate incometax return for the 1999 tax year.1 This return reflected Taxpayer's treatment of gain on the FDISG sale as non-business income to Taxpayer.
¶ 6 Following an audit, the Department issued a notice of proposed assessment for $2,749,706.14, reclassifying the gain from the FDISG sale as business income. Taxpayer timely protested, but the Department's hearing officer ultimately upheld the portion of the assessment resulting from the FDISG sale classification.
¶ 7 Taxpayer appealed to the Arizona Tax Court pursuant to A.R.S. § 42–1254(C). The parties cross-moved for summary judgment on the income classification issue. The tax court granted summary judgment in the Department's favor in a ruling incorporating its statutory analysis in Harris. Consistent with that analysis, the tax court held that proceeds from FDISG were business income to Taxpayer. It then entered a final judgment and this timely appeal followed.
¶ 8 Summary judgment is warranted when “the pleadings, deposition, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Ariz. R. Civ. P. 56(c)(1). We review the grant of summary judgment de novo. Wilderness World, Inc. v. Dep't of Revenue, 182 Ariz. 196, 198, 895 P.2d 108, 110 (1995). We also apply the de novo standard when reviewing the tax court's interpretation of statutes. Ariz. Dep't of Revenue v. Ormond Builders, Inc., 216 Ariz. 379, 383, ¶ 15, 166 P.3d 934, 938 (App.2007).
¶ 9 The parties to this transaction made an election under I.R.C. § 338(h)(10). This federal statute provides:
Elective recognition of gain or loss by target corporation, together with nonrecognition of gain or loss on stock sold by selling consolidated group.
(A) In general.—Under regulations prescribed by the Secretary, an election may be made under which if—
(i) the target corporation was, before the transaction, a member of the selling consolidated group, and
(ii) the target corporation recognizes gain or loss with respect to the transaction as if it sold all of its assets in a single transaction, then the target corporation shall be treated as a member of the selling consolidated group with respect to such sale, and (to the extent provided in regulations) no gain or loss will be recognized on stock sold or exchanged in the transaction by members of the selling consolidated group.
I.R.C. § 338(h)(10). Although Arizona's statutes do not refer to § 338(h)(10), A.R.S. § 43–102(A)(2) adopts the Internal Revenue Code provisions on measurement of corporate income. Similarly, A.R.S. § 43–102(A)(3) directs the application of Internal Revenue Code definitions for corporate income. Furthermore, A.R.S. § 43–1101(1) provides that “Arizona gross income” means the federal taxable income of a corporation for the taxable year. In light of these provisions, the Department accepts the federal tax election for Arizona corporate income tax purposes and treats the sale as one of assets and not stock. See Ariz. Corp. Tax Rul. 98–2, at 2, 1998 WL 34102510 (1998).
¶ 10 The I.R.C. § 338(h)(10) election allows taxpayers to treat qualified stock purchases as asset purchases. Under the election, the subsidiary or target corporation is treated as if it had sold all its assets to the buyer in a taxable transaction. Ariz. Corp. Tax Rul. 98–2, at 2. The primary benefit of this tax treatment is that the purchaser receives a stepped up valuation basis normally only associated with a sale of assets. Id. The target corporation recognizes the gain or loss which is included in the target's current income year. After the sale, the target corporation is treated as liquidating tax-free into its selling corporation. The gain from the deemed sale of assets is still relevant to the selling corporation, however, if the target was a member of the seller's combined unitary group. See Cal. Franchise Tax Rul., CR–88–254, 1988 WL 188432 (1988). Normal intrastate allocation will apply to the gain reported in the combined unitary group. Id. Consequently, while the election identifies the nature of the transaction, we must look to Arizona's statutes to evaluate if the gain constitutes business income.
¶ 11 Arizona imposes a corporate income tax “upon the entire Arizona taxable income of every corporation.” A.R.S. § 43–1111. The Arizona legislature adopted a modified version of the Uniform Division of Income for Tax Purposes Act (“UDITPA”) in order to properly account for corporate income. Under the UDITPA framework, corporate income is subject either to allocation or apportionment. Jerome R....
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...not an exception to application of the functional tests and is thus apportionable income. See, e.g., First Data Corp et al. v. Ariz. Dept. of Revenue, 313 P.3d 548 (Ariz. Ct. App. 2013) and citations therein (declining to follow a liquidation exception to the functional test, whether or not......