Hamilton v. State

• Decision Date: 23 April 1996
• Docket Number: No. 1,CA-TX,1
• Citation: 186 Ariz. 590,925 P.2d 731
• Parties: Harry J. HAMILTON and Ann L. Hamilton, husband and wife; Violet M. Lacy; Mary Williams; Edmund Kocian and Edith Kocian, husband and wife, Plaintiffs-Appellees Cross-Appellants, v. The STATE of Arizona, a body politic; the Arizona Department of Revenue; Paul Waddell, Director of the Department of Revenue, Defendants-Appellants Cross-Appellees. 94-0011.
• Court: Arizona Court of Appeals

Page 731

925 P.2d 731

186 Ariz. 590

Harry J. HAMILTON and Ann L. Hamilton, husband and wife; Violet M. Lacy; Mary Williams; Edmund Kocian and Edith Kocian, husband and wife, Plaintiffs-Appellees Cross-Appellants, v. The STATE of Arizona, a body politic; the Arizona Department of Revenue; Paul Waddell, Director of the Department of Revenue, Defendants-Appellants Cross-Appellees.

No. 1 CA-TX 94-0011.

Court of Appeals of Arizona,

Division 1,

Department T.

April 23, 1996.

Review Denied Oct. 21, 1996.

[186 Ariz. 591] James H. Colter, Phoenix, for Plaintiffs-Appellees Cross-Appellants.

Grant Woods, Attorney General by Gail H. Boyd, Assistant Attorney General, Phoenix, for Defendants-Appellants Cross-Appellees.

OPINION

LANKFORD, Judge.

The taxpayers filed this action for payment of unfiled claims, and retroactive increases in previously filed claims, for certain property tax credits ("PTC"). The Arizona Department of Revenue ("DOR") appeals from summary judgment in favor of the taxpayers. The taxpayers cross-appeal, challenging limitations the tax court placed on the relief it awarded.

We have jurisdiction pursuant to Ariz.Rev.Stat.Ann. ("A.R.S.") section 12-2101(B) (1994). We review the tax court's summary judgment de novo. United Bank of Ariz. v. Allyn, 167 Ariz. 191, 195, 805 P.2d 1012, 1016 (App.1990).

We hold that the tax court should have dismissed the taxpayers' action for failure to exhaust statutory administrative remedies. We also conclude that the tax court erred in holding that PTC credits or payments should have been calculated using "Arizona adjusted gross income" as defined by A.R.S. section 43-1001(1) (Supp.1995). We therefore reverse the tax court's entry of summary judgment in favor of the taxpayers and direct the entry of summary judgment in favor of DOR.

We begin by outlining the relevant provisions of the property tax credit provision involved here, A.R.S. section 43-1072. That statute provides in part:

A. There shall be allowed to each resident a credit against the taxes imposed by this title for a taxable year for property taxes accrued or rent, or both, paid in that taxable year, in accordance with subsection B of this section, if all of the following apply:

1. Such resident attained the age of sixty-five years prior to or during the taxable year or such resident is a recipient of public monies under title 16 of the social security act as amended.

2. Such person paid either property taxes or rent during the taxable year.

3. Such person either:

(a) Did not live with his spouse or any other persons and had an income from all sources in the taxable year of less than three thousand seven hundred fifty-one dollars.

(b) Lived with his spouse or one or more persons and the combined income from all sources in the taxable year of all persons residing in the residence was less than five thousand five hundred one dollars.

Subsection B allows a sliding scale of credits as much as $502 for persons living alone and having "household income" between $0 and $1750 per year, down to as low as $56 for those whose household income is between $3,651 and $3,750. For persons not living alone, different household income limits apply.

Subsection D provides for a set-off of the allowable credits. The credits are to be set off against income taxes otherwise due on the claimant's income for the year; against any other debts owed by the claimant to the state or any of its agencies pursuant to A.R.S. section 42-133; and against any such liability of the claimant's spouse who was a member of the claimant's household in the taxable year. The balance, if any, "shall be paid in the same manner as a refund granted under chapter 6, article 1 of this title [A.R.S. § 43-601 et seq., ¹ governing income tax refunds]." A.R.S. § 43-1072(D)(1) (Supp.1995). Subsection E provides that the DOR "shall make available suitable forms with instructions for claimants." A.R.S. § 43-1072(E) (Supp.1995).

Of central concern is the definition of "income" contained in the statute. The definition includes several components of income, but we are particularly concerned with that part of the definition that includes "[a]djusted gross income as defined by the department." A.R.S. § 43-1072(H)(6)(a) (Supp.1995). The crux of the taxpayers' argument is that because DOR failed to define the term "adjusted gross income," the concept of "Arizona adjusted gross income" ² should have been used in calculating the credits. As part of this argument, taxpayers claim that DOR adopted an inappropriate method of calculating adjusted gross income in its Form 140-PTC, the form given to taxpayers to apply for and calculate the amount of their PTC. ³

I.

Before addressing the merits of the taxpayers' claims, we consider DOR's argument that the trial court should have dismissed the taxpayers' complaint because the taxpayers failed to exhaust administrative remedies. We agree with DOR that dismissal was required for failure to exhaust administrative remedies.

A party's failure to exhaust administrative remedies deprives the superior court of authority to hear the party's claim. We have stated that

if parties have statutory recourse to an administrative agency that has authority to grant appropriate remedies, they must scrupulously follow the statutory procedures. If they fail to utilize all their administrative remedies, the superior court lacks jurisdiction to consider their claim.

Estate of Bohn v. Waddell, 174 Ariz. 239, 245-46, 848 P.2d 324, 330-31 (App.1992), cert. denied, 509 U.S. 906, 113 S.Ct. 3000, 125 L.Ed.2d 693 (1993); see also Mountain View Pioneer Hosp. v. Employment Sec. Comm'n, 107 Ariz. 81, 85, 482 P.2d 448, 452 (1971) ("When a party fails to exhaust all his administrative remedies ... the trial court is without jurisdiction to entertain such action.").

To determine whether a party is required to exhaust administrative remedies, the courts must determine whether an administrative agency has original jurisdiction over the subject matter. See Minor v. Cochise County, 125 Ariz. 170, 172, 608 P.2d 309, 311 (1980) ("The doctrine of exhaustion of administrative remedies applies where a claim is cognizable in the first instance by the administrative agency alone."); see also Johnson v. Mofford, 181 Ariz. 301, 304, 890 P.2d 76, 79 (App.1995); Campbell v. Mountain States Tel. & Tel. Co., 120 Ariz. 426, 429, 586 P.2d 987, 990 (App.1978) (noting that the exhaustion rule applies when an administrative agency has original jurisdiction over the subject matter). In determining whether an administrative agency has been granted original jurisdiction, the courts ask whether the agency "is specifically empowered to act by the Legislature." Minor v. Cochise County, 125 Ariz. at 172, 608 P.2d at 311. "The exhaustion rule ... is usually applied by virtue of express statutory mandate." Estate of Bohn v. Waddell, 174 Ariz. at 246, 848 P.2d at 331 (citing Campbell v. Mountain States Tel. & Tel. Co., 120 Ariz. at 429, 586 P.2d at 990).

DOR provides an administrative remedy that the Legislature has mandated. Section 43-1072(D)(1) states that the net amount of a PTC claim "shall be paid in the same manner as a refund granted under chapter 6, article 1 of this title [A.R.S. § 43-601 et seq.]." Section 43-1072(D)(1) thus incorporates by reference the statutes that govern the administrative income tax refund process. By invoking the administrative remedies that apply to refunds, this statute requires the taxpayers to submit their claims to DOR before filing an action in tax court.

To apply for a refund, a taxpayer must make a written claim stating the specific grounds on which the claim is founded. A.R.S. § 42-129(D) (Supp.1995). If DOR denies the claim, it must notify the taxpayer of the denial, and the taxpayer may then file a request for a hearing under section 42-122. A.R.S. § 42-130(A) (Supp.1995). If the claim is denied after a hearing, the taxpayer may then seek an administrative appeal with the State Board of Tax Appeals. A.R.S. § 42-124(A) (Supp.1995). Only then, and only if the administrative appeal is unsuccessful, may the taxpayer file an action in superior court for the overpaid tax. A.R.S. § 42-124(B)(2) (Supp.1995).

The taxpayers contend that these are not mandatory procedures because the term "may" in sections 42-122, 42-124 and 42-129 makes them permissive. This Court has consistently rejected this argument. See Rosen v. Board of Medical Examiners, 185 Ariz. 139, 912 P.2d 1368 (App.1995), review granted, No. CV-96-0004-PR (Mar. 21, 1996) (citing Arizona Law Enforcement Merit Sys. v. Dann, 133 Ariz. 429, 432-33, 652 P.2d 168, 171-72 (App.1982)) ("The use of the word 'may' indicates an option only in the sense that a party may decide not to pursue any further review."); see also Gilbert v. Board of Medical Examiners, 155 Ariz. 169, 174, 745 P.2d 617, 622 (App.1987); Farmers Inv. Co. v. Arizona State Land Dep't, 136 Ariz. 369, 378, 666 P.2d 469, 478 (App.1982) (holding that use of the term "may" does not indicate that procedural requirements are permissive).

The taxpayers also argue that resort to administrative remedies would be futile. It is true that a party is not required to employ administrative procedures that can in no way provide the party the relief sought. Estate of Bohn v. Waddell, 174 Ariz. at 248, 848 P.2d at 333. The taxpayers contend that administrative remedies would be futile because DOR has established as its policy that it will not use a different definition of adjusted gross income than the definition used in the Form 140-PTC. This argument does not establish futility. First, prior administrative challenges brought by the taxpayers were successful. Second, even if DOR adheres to the Form 140-PTC method of calculating Arizona adjusted gross income, its position has not been tested before the Board of Tax Appeals, an agency independent of DOR. Because DOR's decision may be reversed by the Board, it cannot be said that the...