Tucson Elec. Power Co. v. Arizona Dept. of Revenue
| Citation | 174 Ariz. 507,851 P.2d 132 |
| Decision Date | 08 October 1992 |
| Docket Number | CA-TX,No. 1,1 |
| Parties | TUCSON ELECTRIC POWER COMPANY, Plaintiff-Appellant, v. ARIZONA DEPARTMENT OF REVENUE, Defendant-Appellee. 91-004. |
| Court | Court of Appeals of Arizona |
Tucson Electric Power Company (taxpayer) has appealed from a summary judgment sustaining deficiency assessments against it in excess of $1.2 million for the tax years 1980 and 1981. The deficiency assessments resulted from the Arizona Department of Revenue's disallowance of accelerated depreciation deductions taken by the taxpayer pursuant to former A.R.S. § 43-1030 relating to the installation of pollution control equipment in New Mexico. 1
The issues presented on appeal require that we first examine A.R.S. § 43-1030 to determine the statutory requirements for accelerated amortization eligibility. Once we determine the requirements imposed by the statute, issues are then presented concerning whether the facts show reasonable compliance by the taxpayer with the statutory requirements, or, if not, whether, by reason of the combined conduct of the Arizona Department of Revenue and the Arizona Department of Health Services, the state is estopped to deny compliance.
We now consider the conflicting interpretations of A.R.S. § 43-1030 urged by the state and the taxpayer.
At all times material to this litigation, A.R.S. § 43-1030 provided:
A. Any taxpayer may elect to amortize the adjusted basis of any device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants based upon a period of sixty months. In computing taxable income, such amortization shall be allowed as a subtraction ratably over the period allowed under this subsection beginning with the month in which such device, machinery or equipment is completed or acquired and is placed in service by the taxpayer. This election shall be indicated by the taxpayer in an appropriate statement in the taxpayer's income tax return for the taxable year of the acquisition or completion and placement in service of such devices, machinery or equipment. An election to discontinue amortization with respect to the remainder of the amortization period is permitted and shall be indicated by an appropriate statement on the taxpayer's income tax return for the taxable year of discontinuance.
B. If the taxpayer does not elect to amortize pursuant to subsection A of this section, there shall be allowed a deduction for normal exhaustion, wear and tear of property. The amount of such deduction shall be computed pursuant to the provisions of § 167 of the Internal Revenue Code.
C. In determining the adjusted basis for the purposes of subsection A of this section, such device, machinery or equipment upon certification by the Department of Health Services as a device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device, machinery or equipment as certified by the Department of Health Services.
Although some of the provisions of A.R.S. § 43-1030 are ambiguous, the overall purpose of the enactment is clear. By providing for accelerated amortization of the cost of pollution control equipment, the legislature intended to give Arizona taxpayers, such as the taxpayer in this case, an incentive to install such equipment. The state has contended that the accelerated amortization allowed by A.R.S. § 43-1030 is limited to in-state pollution control equipment. 2 Thus, in its notice disallowing the taxpayer's election of accelerated amortization, the Department of Revenue partly based the disallowance on the department's conclusion that "only pollution control equipment based in Arizona" is eligible for the accelerated amortization authorized by A.R.S. § 43-1030. This is the interpretation that the Arizona Department of Health Services had consistently urged. Based on this interpretation, the Department of Health Services had previously advised the taxpayer that it would not issue any certification relating to the taxpayer's out-of-state pollution equipment. Opposing this view, the taxpayer contends that the accelerated depreciation provisions of the statute apply equally to in-state and out-of-state pollution control equipment.
In considering this issue, the tax court stated that it found nothing in the statute to preclude a taxpayer from obtaining the accelerated amortization merely because the equipment was installed in a plant located outside Arizona. We agree. Subsection A of A.R.S. § 43-1030 provides: "Any taxpayer may elect to amortize the adjusted basis of any device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants based upon a period of sixty months." There is no territorial limitation expressly set forth in the statute, nor any other provisions of the statute from which such a limitation can be implied. We therefore conclude that the Department of Revenue's rejection of the taxpayer's accelerated amortization election cannot be sustained on that basis.
Our discussion of this question is limited to a consideration of the requirements imposed by the statute. We will consider at a later point in this opinion the taxpayer's argument that the state is estopped to deny the efficacy of certification by the New Mexico Environmental Improvement Agency. We agree with the tax court's analysis and conclusion that the statute requires certification by the Department of Health Services. On this point, the statute is clear. As stated by the tax court:
While the statute may not be a model of legislative clarity, it appears clear to the Court that the legislature intended to permit the accelerated amortization of certain pollution control devices. The legislative grant is limited only to that portion of the cost of those devices attributable to the favored function, and is further limited by the requirement that the Department of Health Services certify those devices.
. . . . .
In addition to providing for a deduction intended to favor the installation of pollution control devices, the Court holds that A.R.S. § 43-1030(C) imposed a duty on the Department of Health Services. The Department was obligated to provide the certification required to justify the deduction if, in fact, the device was as described in A.R.S. § 43-1030. That duty devolved on the Department of Health Services no matter where the devices were located.
We conclude that the Department of Health Services violated the duty imposed on it by the statute when it refused to consider certification of the taxpayer's out-of-state pollution control equipment.
Here again, the parties disagree concerning the proper interpretation of the statute. The tax court's characterization of the certification provisions of the statute (subsection C) as not constituting "a model of legislative clarity" is well-founded. Subsection C is grammatically unsound and not susceptible to logical interpretation with any substantial degree of certainty.
When Senate Bill No. 7 (Laws 1968, now A.R.S. § 43-1030) was initially considered by the Senate Committee on Finance and Revenue, subsection C read as follows:
(c) In determining the adjusted basis for the purposes of subsection (a), such device, machinery or equipment shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device, machinery or equipment after December 31, 1968, as certified by the state department of health.
As written, the provision lacks grammatical clarity, although some sense can be made by omitting the first two words and adding the preposition "of" as follows:
[T]he adjusted basis for the purposes of subsection (a) [of] such device, machinery or equipment shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device, machinery or equipment after December 31, 1968, as certified by the state department of health.
However, even if we imply these changes, the provision remains ambiguous. To what do the words "as certified by the state department of health" refer? What must the Department of Health certify? It could be argued that the certification phrase refers back to the word "amount", thereby imposing a requirement that the Department of Health audit the taxpayer's accounting records and, after verification, certify the actual amount expended by the taxpayer on pollution control equipment. If such was the intent, it would appear that the certification phrase should have immediately followed the word "amount". On the other hand, the phrase "as certified by the state department of health" more closely follows the nouns "device, machinery or equipment" and therefore could be considered as evidencing a legislative intent that the Department of Health was required to certify that the "device, machinery or equipment" was actually pollution control equipment qualifying for the accelerated amortization authorized by the statute.
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