General Motors Corp. v. Arizona Dept. of Revenue

• Decision Date: 26 November 1996
• Docket Number: CA-TX,No. 1,1
• Citation: 938 P.2d 481,189 Ariz. 86
• Parties: , 230 Ariz. Adv. Rep. 48, Pens. Plan Guide (CCH) P 23931K GENERAL MOTORS CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant-Appellee. 95-0015.
• Court: Arizona Court of Appeals

Page 481

938 P.2d 481

189 Ariz. 86, 230 Ariz. Adv. Rep. 48,

Pens. Plan Guide (CCH) P 23931K

GENERAL MOTORS CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, an agency of the State of Arizona, Defendant-Appellee.

No. 1 CA-TX 95-0015.

Court of Appeals of Arizona,

Division 1, Department T.

Nov. 26, 1996.

Reconsideration Denied Jan. 24, 1997.

Review Denied July 1, 1997.

Quarles & Brady by Michael G. Galloway Jeffrey A. Sandquist, Phoenix, for Plaintiff-Appellant

Grant Woods, Attorney General by Gail H. Boyd, Kimberly J. Cygan, Special Assistant

Attorney General, Phoenix, for Defendant-Appellee.

TOCI, Judge.

General Motors Corporation ("GM"), a Delaware corporation headquartered in Detroit, Michigan, engages in automobile manufacturing. The Arizona Department of Revenue ("DOR") audited GM primarily concerning sales of automobiles to GM dealerships and assessed additional Arizona income taxes for the tax years 1976 through 1983. GM challenged DOR's assessment before DOR and the State Board of Tax Appeals, Division Two. Ultimately unsuccessful, it brought this action in the Arizona Tax Court in February 1994. On cross-motions for summary judgment, the tax court ruled for DOR without stating its reasons, and GM now appeals.

We have appellate jurisdiction pursuant to Ariz.Rev.Stat. Ann. ("A.R.S.") section 12-2101(B). We find no errors by the tax court and therefore affirm on all issues.

I. ISSUES PRESENTED

GM contends that DOR wrongly:

(1) disallowed GM's deductions for contributions to its Employee Stock Ownership Plan from 1979 through 1983;

(2) used 100 percent of GM's Arizona destination sales in the formula for apportioning a share of GM's total income to Arizona for the years 1978 through 1983;

(3) disallowed GM's deductions in tax years 1976 through 1978 for sums it paid to General Motors Export Corporation, a GM subsidiary operated as a domestic international sales corporation pursuant to 26 U.S.C. §§ 991-997; and

(4) apportioned and taxed as Arizona-source income a share of GM's patent royalties during tax years 1976 through 1983.

Given the rather lengthy factual and legal history related to the individual issues, we will summarize the background of each and address its merits in turn.

II. STANDARD OF REVIEW

In reviewing the grant of summary judgment, we take the facts in the light most favorable to GM, the non-moving party, and we determine de novo whether the trial court properly applied the law. Gonzalez v. Satrustegui, 178 Ariz. 92, 97, 870 P.2d 1188, 1193 (App.1993).

III. EMPLOYEE STOCK OWNERSHIP PLAN CONTRIBUTIONS

From 1979 through 1983, GM maintained and contributed to an Employee Stock Ownership Plan ("ESOP"). Under the United States Internal Revenue Code ("I.R.C."), GM could elect each tax year either to take a credit for its ESOP contributions against its federal income tax liability or a deduction in that amount from its federal gross income. ¹ In each of the tax years 1979 through 1983, GM elected the former.

In 1978, our legislature adopted a new income tax code, the Arizona Income Tax Act of 1978, ² which for the first time directly adopted each corporate taxpayer's "federal taxable income for the taxable year" as the corporation's "Arizona gross income." A.R.S. § 43-1101(1) (Supp.1996). ³ The statutes specify the adjustments to a taxpayer's Arizona gross income that yield its "taxable income" or "net income." A.R.S. §§ 43-1121 through 43-1130.01 (Supp.1996); A.R.S. § 43-1101(2),(6) (Supp.1996).

By operation of A.R.S. section 43-1101(1), GM's Arizona gross income figure for each tax year in issue consequently reflected no reduction for GM's yearly ESOP contributions. Although no Arizona statute allowed either a credit or a deduction for ESOP contributions against a taxpayer's state income tax liability, ⁴ GM deducted those contributions in calculating its Arizona taxable income. ⁵

GM argues that Arizona law must permit a deduction for ESOP contributions because it does not allow a credit for such contributions. Further, GM argues that when DOR disallowed those deductions, DOR directly taxed its ESOP contributions in violation of the federal preemption doctrine. It also contends that denial of the ESOP deduction violated its right to equal protection of the law by treating disparately a corporate taxpayer that claimed a federal tax credit from one that did not. We first consider whether Arizona law authorized a deduction for ESOP contributions.

A. Deductibility of GM's ESOP Contributions

GM argues that Arizona's adoption of the I.R.C. provisions was intended only to adopt those provisions logically consistent with Arizona's tax scheme but not to adopt any that were logically inconsistent. Because Arizona law lacks a tax credit for ESOP contributions, reasons GM, the federal provision that denies the ESOP deduction to a taxpayer that accepted the alternative federal tax credit never became operative in Arizona, and DOR could not deny it a legitimate business expense deduction.

GM's argument hinges on the unarticulated premise that after passage of the new tax act, Arizona still allowed an "ordinary and necessary business expenses" deduction from Arizona gross income and that DOR improperly applied the federal provision denying a deduction for ESOP contributions to taxpayers who had opted for a federal tax credit. Cf. Former A.R.S. §§ 43-123.03, 43-123.18. GM's premise, however, lacks any statutory support. Under the 1978 Tax Act, Arizona adopted all I.R.C. provisions "resulting in an amount called ... taxable income for corporations," including the provision that authorizes the federal business expenses deduction. A.R.S. § 43-102(A)(2), (3); A.R.S. § 43-1101(1). Because that deduction, among others, would be factored into a taxpayer's federal taxable income (adopted as Arizona gross income), the 1978 Act logically eliminated Arizona's former business expense and other deduction provisions as unneeded and duplicative. See 1978 Ariz. Sess. Laws Ch. 213, § 1.

No post-1978 law authorizes a deduction from Arizona gross income for a corporate taxpayer's ESOP contributions. Those contributions will be absent from a taxpayer's Arizona taxable income only to the extent that the taxpayer previously deducted them from federal gross income in arriving at federal taxable income (Arizona gross income). Because GM could not both deduct the expenses and receive a tax credit for federal tax purposes, DOR properly disallowed GM's deductions from Arizona gross income for ESOP contributions. See Arizona Dep't of Revenue v. Transamerica Title Ins. Co., 124 Ariz. 417, 420, 604 P.2d 1128, 1131 (1979) (right to tax deduction is purely statutory).

GM cites numerous cases from other jurisdictions whose tax schemes differ substantially from ours. For example, in George, Inc. v. Norberg, 444 A.2d 868 (R.I.1982), cert. denied sub nom. Norberg v. George, Inc., 459 U.S. 908, 103 S.Ct. 214, 74 L.Ed.2d 170 (1982), the state tax provision expressly authorized a taxpayer to reduce its gross income by items deductible under federal income tax law. Arizona has no such provision, and thus Norberg is inapposite. GM's analogy to Winterset, Inc. v. Commissioner of Taxes, 144 Vt. 230, 475 A.2d 231 (1984), is no more persuasive. Although federal law required the taxpayer to reduce its wage/salary deductions in exchange for a job creation tax credit, Vermont's own income tax calculations were not tied to federal taxable income. The Vermont Supreme Court held that the employer need not reduce the wage/salary deduction on the state return. Similarly, in Bogner v. State Department of Revenue and Taxation, 107 Idaho 854, 693 P.2d 1056 (1984), Idaho allowed taxpayers to take any deductions defined by federal law whether or not they had actually claimed those deductions on their federal returns. These cases do not control here.

Arizona law did not authorize the ESOP deduction that DOR disallowed for taxable years 1979 through 1983, and the assessment is entirely proper.

B. Preemption by ERISA

The parties agree that GM's ESOP is a qualified defined contribution plan governed by the federal Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001 through 1461. ERISA contains an express preemption provision that states in part, "[T]he provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan " and not exempt under the statute. 29 U.S.C. § 1144(a) (emphasis added).

GM urges a very broad construction of this preemption provision. It contends that some courts have held that ERISA preempts state taxing statutes and that any state statute with the slightest effect on an employee benefit plan is void; that DOR's disallowance is a direct tax on GM's contributions to its qualified pension plan, which in turn deters contributions to such plans; and that the disallowance effectively controls its federal tax reporting, contrary to the intent of the preemption provision.

We cannot agree that the preemption provision reaches this far. The United States Supreme Court has acknowledged the "expansive" nature of the ERISA preemption language. See, e.g., FMC Corp. v. Holliday, 498 U.S. 52, 58, 111 S.Ct. 403, 407-08, 112 L.Ed.2d 356, (1990); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 45-46, 107 S.Ct. 1549, 1551-52, 95 L.Ed.2d 39 (1987). But, 29 U.S.C. § 1144(a) does not annul every state enactment that affects an employee benefit plan. As the Court indicated in Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 100 n. 21, 103 S.Ct. 2890, 2901 n. 21, 77 L.Ed.2d 490 (1983), "Some state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan." See Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988) (state garnishment of...