State v. Airesearch Mfg. Co., Inc.
| Decision Date | 23 May 1949 |
| Docket Number | 5071 |
| Citation | 68 Ariz. 342,206 P.2d 562 |
| Parties | STATE v. AIRESEARCH MFG. CO., Inc. |
| Court | Arizona Supreme Court |
Appeal from Superior Court, Maricopa County; Dudley W. Windes Judge.
Proceeding for income tax refund by Airesearch Manufacturing Company Inc., a corporation, against the State of Arizona, a body politic, and Joe Hunt and others, as members of and constituting the Arizona State Tax Commission. From the judgment, the State and the Arizona State Tax Commission appeal.
Reversed and remanded with directions.
Evo DeConcini, Atty. Gen., Charles D. McCarty, Asst. Atty. Gen Edward Jacobson, Asst. Atty. Gen., for appellants.
Snell, Wilmer, Walsh & Melczer, of Phoenix, for appellee.
Phelps, Justice. Udall and Stanford, JJ., and Croaff and Farley, Superior Judges, concur. LaPrade, C. J., being ill, and DeConcini, J., having disqualified himself, the Honorable Thomas J. Croaff, Judge of the Superior Court of Maricopa County, and the Honorable Gordon Farley, Judge of the Superior Court of Santa Cruz County, were called to sit in their stead.
The appellee, Airesearch Manufacturing Company, Inc., hereinafter referred to as the company, was incorporated to do business in the state of Arizona in July, 1942, its purpose being to carry on a defense plant activity as a part of the war program. It continued its operations until sometime during the year 1946 when it closed up its affairs and withdrew from the state.
During the period of its operation it kept its books on an "accrual" basis as distinguished from a "cash" basis. The company in submitting its income tax report to the Arizona State Tax Commission, hereinafter referred to as the commission, in computing the amount due, deducted as a credit on its income the federal income taxes actually paid during the year. However, it showed in each of the years it filed its state income tax report the accrued federal income tax which it declared to be nondeductible. For example, in the year 1943-1944 it deducted as federal income tax, taxes paid -- $ 48,192.09, and showed an accrual of federal income taxes for that fiscal year of $ 871,400. In the year 1944-1945 it deducted $ 871,095.83 federal income tax actually paid, so that the deductions over a period of years, whether on an accrual basis or a cash basis would be the same.
After the company had discontinued its operations in Arizona, to wit, on May 6, 1946, pursuant to the renegotiations of the company's 1943-1944 profit, it filed with the commission an amended income tax return for that year together with a claim for a refund of income taxes pursuant to the provisions of section 73-1544, A.C.A.1939. The commission approved the claim in the sum of $ 10,111.18 which was later reduced to judgment in the Superior Court of Maricopa County in accordance with the provisions of law relating to refunds in excess of $ 1000.
On September 4, 1946 the company filed with the commission a second amended income tax return together with a second claim for refund of the 1943-1944 income taxes in the amount of $ 33,568.81 based upon the ground that it had just discovered an error in its returns to the Tax Commission in which it had deducted federal income taxes actually paid instead of deducting federal income taxes accruing during the fiscal year involved.
On the same date it filed a claim for a refund of $ 26,151.63 for the fiscal year 1944-1945 based upon the same ground. For the fiscal year 1945-1946 the company filed its return with the State Tax Commission deducting its federal income tax on an "accrual" basis instead of on a "cash" basis as it had been accustomed to do and paid to the commission $ 20,000 income tax. Had the company made its return to the commission for said year deducting the federal income tax on a "cash" basis instead of an "accrual" basis there would not have been due any income tax whatever to the state.
On December 12, 1946 the company filed a motion in the Superior Court of Maricopa County to reopen the judgment it obtained in that court on June 14, 1946 to permit the company to file a supplemental complaint or in the alternative to reopen the judgment to permit the company to file an amended complaint based on the fact that the company claimed an additional refund from the state by virtue of its alleged error in deducting federal income taxes.
On December 13, 1946 the commission entered its order denying both of the claims for refund for the fiscal years 1943-1944 and 1944-1945. The company requested a hearing before the commission which was granted. A formal hearing was had before the commission on May 21, 1947 on the petition for the refund for the fiscal year 1943-1944. No hearing was had on the claim for refund for the year 1944-1945 because of pending renegotiating proceedings between the company and the federal government.
On June 4, 1947 the commission entered its order denying the refund from which an appeal was taken to the Superior Court of Maricopa County. The matter proceeded to hearing before that court which thereafter entered its judgment requiring the commission to recompute the company's income for the year 1943-1944 and to allow the company a deduction of federal income taxes on an accrual basis instead of a cash basis. From that judgment an appeal was taken to this court.
The commission has assigned as error:
1. That the court erred in denying appellant's motion to dismiss and in entering judgment for the appellee for the reason that the court was without jurisdiction in the premises.
2. The court erred in overruling appellant's plea in abatement and in entering judgment for the appellee for the reason that there was then pending in the same court an action involving substantially the same parties seeking the identical relief sought here.
3. The court erred in entering judgment for appellee for the reason that it appeared on the face of the appeal that appellee had deducted its federal income taxes according to law and was not entitled to a refund.
4. The court erred in entering judgment for appellee for the reason that it appeared on the face of the appeal that the federal income taxes had been deducted in accordance with the valid regulations of the commission.
The assignments of error present both procedural and substantive questions of law for our determination.
We prefer to consider first the question of whether in making its income tax report to the commission in 1944-1945 the company, under the facts in this case, was required by law to deduct its federal income taxes upon a "cash" or an "accrual" basis or whether it could elect the one or the other, depending upon its method of bookkeeping. We will later consider the question relating to procedure.
The company claims that the law requires it to deduct its federal income tax on an accrual basis because its books of account were kept on an accrual basis, while the commission claims that said federal income tax deductions must be made on a cash basis regardless of how the taxpayer's books of account are kept.
Both rely upon the same provision of the act as authority for their respective positions, to wit, sections 73-1510 and 73-1519.
Section 73-1510, sub-section (e) provides insofar as applicable here: "* * * that allowable deduction for federal income taxes shall be limited to taxes paid on net income taxable under this act."
Section 73-1519, sub-sections (a) and (b) provide:
The commission claims that the portion of the statute set forth above, reading: "* * * provided that the deduction for federal income taxes shall be limited to taxes paid on net income taxable under this act * * *" is a mandatory order to the taxpayer to deduct only federal income taxes actually paid during the year while the company claims that it plainly enjoins upon the taxpayer the duty to make such deductions on an accrual basis where its books of account are kept on an accrual basis. A careful analysis of the language used in the above proviso compels the conclusion that it is not susceptible of either interpretation ascribed to it but that it clearly means that the legislature intended to limit, and did limit, deductions of federal income taxes, whether on a cash or an accrual basis, to taxes computed on the same net income as shown on the state income tax return, for example, if the net income shown to be taxable by the state was $ 125,000 the federal income tax allowable as deductible must be computed upon the same net income as shown by the state income tax return, even though the net income as shown on the federal income tax return is $ 250,000. In that case the federal income taxes would be computed upon the basis of $ 250,000 net income yet the state would only allow credit for deductions for federal income taxes on an amount equal to $ 125,000 net income.
Sub-section (b) of section 73-1519 says: "'Paid' or 'actually paid' are to be construed in the light of the method used in...
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