State ex rel. Arizona Dept. of Revenue v. Talley Industries, Inc., 1
| Decision Date | 13 September 1994 |
| Docket Number | No. 1,CA-TX,1 |
| Citation | 893 P.2d 17,182 Ariz. 17 |
| Parties | STATE of Arizona, ex rel., ARIZONA DEPARTMENT OF REVENUE, Plaintiff-Appellant, Cross-Appellee, v. TALLEY INDUSTRIES, INC., Talley Realty Investment Group, Inc.; Mesa Co., Inc.; Talley Realty Development, Inc.; Talley Leasing Co.; TRP Technology, Inc., formerly known as Russell Plastics; Dynamic Science; Talley Industries of Arizona, Inc.; Talley Services, Inc.; Universal Propulsion Co.; Adorence Co., Inc.; Electrodynamics; General Time Controls; General Time Corp.; General Time Instruments; Minelco, Inc.; Robert Allen Classics; Stencel Aero Engineering; TPV Investments; Talley Education Services; Talley International Services; Talley Stencel Corp.; Talley Support Services; Talley Technical Services; Talma, Inc.; and Waterbury Companies, Inc., Defendants-Appellees, Cross-Appellants. 92-0013. |
| Court | Arizona Court of Appeals |
This appeal involves the Arizona income of Talley Industries, Inc. ("Talley") and its twenty-five subsidiary companies (collectively, "the Talley group"). In 1983, Talley apportioned 16.26 percent of the combined net income of the Talley group for Arizona state income taxation. 1 Talley contends that the Talley group is a "unitary business" and thus is entitled to apportion to Arizona a share of the Talley group's overall income from sources within and outside Arizona. The Arizona Department of Revenue ("the Department") argues that this Arizona apportionment ratio does not accurately state the Arizona income of the subsidiaries doing business in Arizona. Consequently, according to the Department, the tax court erred in sustaining Talley's combined Arizona income tax filing.
The provisions of Ariz.Rev.Stat.Ann. ("A.R.S.") section 43-307 (Supp.1993) require every corporation subject to Arizona income tax to file a return. The issue is whether A.R.S. section 43-307 is superseded because combined reporting of overall net income by Talley and all of its subsidiaries was necessary under A.R.S. section 43-947 (1980) "to clearly reflect the taxable income earned by such corporation or corporations from business done in this state." In other words, can Talley properly file a single state income tax return for the tax year in question, combining all net incomes or losses of each subsidiary into a single, group-wide net income or loss figure for apportionment to Arizona?
The Department also challenges the tax court's award of attorneys' fees incurred by Talley in exhausting its administrative remedies before bringing this action. Talley cross-appeals from the tax court's decision to limit its attorneys' fees award to reimbursement at $75.00 per hour.
We hold that because no substantial interrelationship or interdependence of basic operations exists among the various subsidiaries, the fact that the Talley group is an integrated business does not justify combining all net income or losses of its subsidiaries into a single net income or loss figure for apportionment to Arizona. Consequently, the tax court erred in entering its judgment that the Talley group could properly file a single combined state income tax return for the year in question.
Title 43 of the Arizona Revised Statutes Annotated is the Arizona Income Tax Act of 1978, enacted by Act of June 14, 1978, 1978 Ariz.Sess.Laws 1085, 1085-1205. See A.R.S. § 43-101 (1980). One of the legislature's purposes in adopting the Act was to "impose on each ... corporation with a business situs in this state a tax measured by taxable income which is the result of activity within or derived from sources within this state." A.R.S. § 43-102(A)(5) (Supp.1993).
Arizona tax law requires the filing of a corporate tax return and imposes, for each taxable year, a tax on every corporation's entire "Arizona taxable income." A.R.S. § 43-1111 (Supp.1993). "Arizona taxable income" is defined as a corporation's federal taxable income subject to adjustments specified in A.R.S. sections 43-1121 through 43-1130 (1980 & Supp.1993). See A.R.S. § 43-1101 (Supp.1993). "Every corporation subject to the tax imposed by this title shall make a return to the department." A.R.S. section 43-307(A) (Supp.1993). Even if a corporation has no federal taxable income or a federal tax return is not required, a corporation must file a state return. A.R.S. § 43-307(C) (Supp.1993).
This appeal does not raise the question of whether formulary apportionment of income pursuant to A.R.S. section 43-1141 (repealed by Act of April 27, 1983, 1983 Ariz.Sess.Laws 1078, 1080) and Arizona Administrative Code ("A.A.C.") R15-2-1141 (repealed 1986) is applicable to this case. 2 Both parties agree that, regardless of the outcome of this case, such apportionment will be applied in determining Arizona taxable income of the Talley group companies. Rather, this appeal concerns the means by which the net income or net incomes to be apportioned are to be arrived at in the first place.
During 1983, Talley was the parent corporation of the twenty-five wholly-owned subsidiaries named as co-defendants in this action. Talley's principal place of business is in Maricopa County, Arizona. Ten 3 of the subsidiaries had property, payroll, or sales in Arizona; the remaining fifteen did not. Several of the subsidiaries manufacture and supply numerous commercial and high technology products for defense and industrial uses. Others manufacture timepieces and timekeeping instrumentation, import men's and women's apparel, and buy and sell real property primarily for commercial and industrial development.
Talley claims that the Tally group is a "unitary business" under the traditional definition of that term and is thus entitled to file a combined return. It relies on the following facts to support its claim that it is a "unitary business."
Talley owned 100 percent of the capital stock of the twenty-five subsidiary corporations and essentially controlled all of their operations. Talley's tax department prepared federal, state and local income tax returns for each subsidiary. It formulated the accounting, general operating, and personnel policies for all subsidiaries. Talley also borrowed funds, incurred corporate office costs, and acted as banker for its subsidiaries. Talley determined each subsidiary's salary guidelines, designated accounting manuals and methodologies, selected auditing firms, set insurance requirements, and established employee benefit and pension plans. Any claims against a subsidiary were handled by Talley under its general liability insurance policy. And, Talley's corporate officers served on each subsidiary's board of directors and supervised the operation of that subsidiary.
Other similar ties existed between Tally and its subsidiaries. Talley required that each subsidiary's checks, letterhead, purchase orders, and sales materials bear the Talley logo, and that each subsidiary annually submit its budget to Talley for approval. Talley's Information Services Manager reviewed each subsidiary's computer needs and, as necessary, designed appropriate systems to meet them. Talley regularly conducted company-wide training programs and seminars on safety, employee benefits, supervisor training, occupational health and safety, antitrust law, products liability, and hazardous waste. It also purchased automobiles and computer equipment, negotiated contracts, and reviewed, suggested, or implemented manufacturing processes, new products, market strategies, quality control programs, and customer relations programs for the subsidiaries. And, Talley scheduled regular meetings of the subsidiary presidents for the sharing of technical and management expertise. In turn, the subsidiaries provided Talley with technical expertise and shared operational employees when necessary.
Notwithstanding the above, the record establishes no substantial interrelationship between the subsidiaries. There were no transfers of materials, products, goods, technological data relating to products, processes, machinery, or equipment by subsidiaries operating wholly outside Arizona to subsidiaries with operations in Arizona. Also, virtually no flow of product and no vertical or horizontal integration of business operations exists between the subsidiaries with, and those without, income-producing factors and business operations in Arizona. No basic operational ties existed between the two Arizona real estate subsidiaries and any other Talley subsidiary.
The net federal consolidated income for the Talley group for the fiscal year ending in 1983 was $16,450,536.00. When proportional shares of Talley's net operating loss were allocated to the eight subsidiaries with Arizona business operations, those subsidiaries earned a net $13,603,392.00 of the Talley group's net federal income, or 82.7 percent of the total.
The filing method advocated by the Department allocates to Arizona a company-specific share of the income of each member of the Talley group with Arizona factors. This would subject to Arizona income taxation a combined total of $10,277,406.00--or 62.2 percent of the Talley group's net federal consolidated income. The combined filing that Talley actually made for the year in question was substantially less. The combined return netted together the income and loss figures of all twenty-six members of the group and arrived at a unitary Arizona allocation share of 16.26 percent. The latter percentage was obtained by using the arithmetic...
To continue reading
Request your trial
-
Louis Dreyfus Corp. v. Huddleston
...must be a substantial interrelationship or interdependence among its basic operations. See State ex rel. Arizona Dep't of Revenue v. Talley Indus., Inc., 182 Ariz. 17, 893 P.2d 17, 24 (Ct.App.1994). While there is substantial interdependence among the Louis Dreyfus Corporation's six commodi......
-
In re Envirodyne Industries, Inc.
...with Louis Dreyfus Corp. v. Huddleston, 933 S.W.2d 460, 469-71 (Tenn.App.1996); State ex rel. Arizona Dep't of Revenue v. Talley Industries, Inc., 182 Ariz. 17, 893 P.2d 17, 25-26 (App. 1994); Department of Revenue v. Terrace Tower U.S.A., Inc., 15 Ore. Tax 168, 173 (Tax Ct.2000), and Centr......
-
Arizona Dept. of Rev. V. Central Newspapers
...a single business files a combined report. See A.R.S. § 43-942 (2006). As we explained in State ex rel. Arizona Department of Revenue v. Talley Industries, Inc., 182 Ariz. 17, 893 P.2d 17 (App.1994), a combined report is appropriate when "there is a substantial interdependence of basic oper......
-
Barlage v. Valentine
...interpretation of Dill is correct, we of course would not be bound by that case. See State ex rel. Ariz. Dep't of Revenue v. Talley Indus., Inc., 182 Ariz. 17, 22, 893 P.2d 17, 22 (App. 1994). 7."Generally, issues and arguments raised for the first time at oral argument on appeal are untime......
-
Arizona Court Of Appeals Holds Retailer And Subsidiary Trademark Company Were Unitary, Combined Return Required
...Arizona Department of Revenue, 229 P.3d 266 (Ariz. Ct. App. 2010). ARIZ. ADMIN. CODE R15-2D-401(B); see also ARIZ. REV. STAT. § 43-942(B). 893 P.2d 17 (Ariz. App. Ct. Id., quoting Jerome R. Hellerstein & Walter Hellerstein, State Taxation, ¶ 8.11[5] at 8-92. Id. 229 P.3d 266 (Ariz. Ct. ......