Opinion
TX 2021-000516
09-12-2022
MESQUITE POWER L L C v. ARIZONA DEPARTMENT OF REVENUE
PAUL J MOONEY LISA A NEUVILLE JUDGE
UNDER ADVISEMENT RULING
HONORABLE SARA J. AGNE, JUDGE
The Court held oral argument on August 12, 2022, regarding Defendants Arizona Department of Revenue and Maricopa County's Motion for Summary Judgment filed March 8, 2022 ("Department's Motion"), and Plaintiff Mesquite Power, LLC's Cross-Motion for Partial Summary Judgment on Defendants/Counterclaimants' Counterclaim filed April 12, 2022 ("Cross-Motion"), as well as subsequent filings related thereto.
The Court has considered the filings and arguments of the Parties, the relevant authorities and applicable law, as well as the entire record of the case, and-considering all facts and reasonable inferences therefrom in the light most favorable to the non-movants, respectively- hereby finds as follows regarding the Motion and Cross-Motion.
Mesquite Power, LLC ("Mesquite") owns an electric power generation facility known as Mesquite Block 2 in Maricopa County (the "Subject Property") that was put into service in 2003. (See DSOF filed March 8, 2022, at ¶¶1, 2, materially undisputed.) This case concerns the Department's valuation of the Subject Property for tax year 2022. (Compl., filed December 14, 2021, at 2.) Valuation of electric generation facilities in Arizona is governed by the formulas set out in A.R.S. § 42-14156(A), which defines "cost" for purposes of those formulas in A.R.S. § 42-14156(A)(6).
There, "Cost" is defined as "the cost of constructing the property or acquiring the property in an arm's length transaction." A.R.S. § 42-14156(A)(6)(a). The Department asserts without support that a purchase price allocation-as it contends Mesquite engaged in here-is not an arm's length transaction. (Resp. to Cross-Motion, filed April 29, 2022, at 12 n.2).
While the Parties devoted some time to their respective arguments on whether Mesquite reported its costs correctly pursuant to A.R.S. § 42-14156(A)(6), as stated below, the Court has found that Mesquite filed its annual report for tax year 2022 and therefore did not forfeit its right to appeal the valuation pursuant to A.R.S. § 42-14152. (The gist of the Department's Motion argues that Mesquite did forfeit that right.) The Court's findings are not dependent on a determination of whether Mesquite calculated its costs correctly under the statute, however. Mesquite has not filed a motion for summary judgment on that issue.
Each year owners of electric generation facilities must file "a report with the department, under oath, stating the information that the department requires to enable it to make a valuation of the property." A.R.S. § 42-14152(A). Mesquite filed Form 82050 for tax year 2022 as if most the property had been acquired in calendar year 2018. (DSOF ¶21, materially undisputed.)
The Department asserts that Mesquite did not provide the cost information by vintage year, and as a result, the Department could not apply the statutory formulation in A.R.S. § 42-14156-it contends it did not have "the information that the department requires to enable it to make a valuation of the property." (See Mot., at 5); see also A.R.S. § 42-14152(A). Thus, the Department valued the Subject Property for tax year 2022 at 105% of the tax year 2021 value. (See DSOF ¶25, materially undisputed as to that fact.)
Mesquite filed its Complaint in this action based on its allegations that the full cash value set by the Department exceeds the Subject Property's fair market value. (Compl., at 3.) The Department filed a counterclaim seeking a declaration that Mesquite failed to timely file its annual report and therefore forfeited its right to appeal the Department's valuation. (Countercl., filed Jan. 14, 2022, at 4.)
Defendants seek summary judgment determining that Mesquite improperly reported its cost information based on an allocation of the purchase price of Mesquite's membership interests, declaring that Mesquite failed to satisfy its statutory obligation to file an annual report, declaring that Mesquite therefore forfeited its right to appeal the Department's valuation, and dismissing Mesquite's complaint for tax year 2022 with prejudice. (Mot., at 13.)
The Department relies on A.R.S. § 42-14152(D) to contend that Mesquite forfeited its right to appeal the valuation in this matter. See id. ("If the report is not filed by May 20 of the valuation year, the company forfeits its right to appeal the valuation and classification pursuant to § 42-14005.").
The Department supplies Form 82050 to taxpayers in order to obtain the information required to value the property. (See A.R.S. § 42-14152(A); see also DSOF, Exh. A, at its Exh. 1). Mesquite filed the form by April 1, 2021. (DSOF, Exh. A, at its Exh. 1, at 18 of 19; see also PSOF filed April 12, 2022, ¶52, undisputed that Mesquite sent in an annual report form timely; DSOF ¶21, materially undisputed). However, the Department asserts that Mesquite failed to report its costs by vintage year for tax year 2022 and that the Department needed such costs to apply the statutory valuation formula. (Mot., at 8.)
Mesquite provided cost information based on the purchase price allocation of the 2018 membership interest sale of Mesquite. (PSOF ¶53, materially undisputed as to this fact; DSOF ¶21, materially undisputed). Historically, Mesquite had filed annual reports from 2017 to 2022 based on the purchase price allocation of the sales in 2015 and 2018. (See PSOF ¶57.) Here, the Court notes that the Department objects to PSOF ¶57 as a mischaracterization of Mr. Casey's deposition testimony and a misleading portrayal of the Department as having prior acquiesced to Mesquite's position on these issues. Upon review, THE COURT FINDS the deposition testimony cited (Exh. J to PSOF, at 23:13-25:9) in support of PSOF ¶57 to be fairly characterized by that statement of fact, and the Court can review for itself the records that set forth the Department's prior and present positions, which were also discussed in the record of briefing and at oral argument. Therefore, IT IS ORDERED overruling the Department's evidentiary objections to PSOF ¶57.
Previous cases involving the valuation of the Subject Property support Mesquite's position. In Arizona Dep't of Revenue v. Mesquite (TX2015-000095), involving tax years 2016 and 2017, the Tax Court observed that ArcLight had "purchased all ownership, membership, and other interests in Mesquite in 2015." (PSOF, Exh. A, at 1.)
There, the Court ultimately found "that ADOR correctly utilized A.R.S. § 42-14156(A)(6)(d)(i) for calculating the cost factors subject to the statutory formula." (PSOF, Exh. A, at 3). That clause of the statute-like its counterpart, A.R.S. § 42-14156(A)(6)(d)(ii)-applies only when a facility is acquired from another taxpayer. In fact, clause (i) applies "if, after the acquisition, the buyer has possession of the cost information," and clause (ii) applies in the opposite scenario, when "the buyer does not possess the cost information." A.R.S. § 42-14156(A)(6)(d)(i), (ii).
Here, Mesquite is in the latter scenario, in that it does not possess the cost information after all of its membership interests were acquired by another taxpayer in an arm's length transaction. (See PSOF ¶¶ 34, 35; A.R.S. § 42-14156(A)(6)(d)(ii).) The Department does not actually dispute these statements of fact by Mesquite; instead, the Department disputes whether Mesquite did enough "to try to locate cost information." (See Resp. to PSOF filed April 29, 2022, at ¶12.)
The Department cites no statute or case law requiring an arm's-length acquirer to take certain steps to investigate or discern cost information from the records of its predecessor-in-interest in order to satisfy A.R.S. § 42-14152(A) reporting requirements. Reading in such a requirement would render clause (ii) of A.R.S. § 42-14156(A)(6)(d) plainly superfluous. See Fann v. State, 251 Ariz. 425, 434 (2021) ("We also avoid interpreting a statute in a way that renders portions superfluous.").
The Department disputes that an acquisition of all of Mesquite's membership interests can mean that the electric generation facility was "acquired from another taxpayer," and asserts that the taxpayer here remains Mesquite-despite the acquisition noted in PSOF ¶¶30-31. (Resp. to PSOF, at ¶11.) At argument in this and the companion case heard the same day (TX2021-000517), the Department urged the Court to review Sun Devil Power Holdings, LLC v. ADOR, 240 Ariz. 339, 341 (App. 2016), for the proposition that an LLC can be a taxpayer for property tax purposes, so the Court should find that Mesquite remains the LLC taxpayer here.
The Court does not find that case instructive, however, on the issue of whether an arm's length acquisition of all of the membership interests of an LLC means the identity of the taxpayer has changed, notwithstanding the LLC's name remains the same. Sun Devil Power Holdings, LLC, nowhere addresses that particular issue, but in that case, too, the Department was found to be attempting to insert "into the statute a restriction that its plain language does not provide." Id. at 344.
Based on the plain statutory language here, the Court cannot conclude that Mesquite forfeited its right to appeal the valuation by filing a report that the Department disagrees with. See A.R.S. § 42-14152(A) ("each company that is valued pursuant to this article shall file a report with the department, under oath, stating the information that the department requires to enable it to make a valuation of the property"); see also A.R.S. § 42-14156(A)(6)(d).
Here, it is undisputed that Mesquite filed a report and acted consistently with how it included costs in its previous reports and prior Tax Court rulings involving sales of membership interests in the LLC. (DSOF ¶21, materially undisputed; PSOF ¶57, objections previously overruled).
The Department argues that a taxpayer could supply "garbage" information and still comply with the statute under Mesquite's position. (Resp. to Cross-Motion, filed April 29, 2022, at 12.) Yet, Mesquite did not provide "garbage" information, but information based on its calculated costs as permitted by A.R.S. § 42-14156(A)(6)(d)(ii).
Unlike the taxpayer in Sun Devil Power Holdings, LLC, 240 Ariz. at 344, ¶15, Mesquite did not possess the cost information targeted by A.R.S. § 42-14156(A)(6)(d)(i), so reporting the (d)(ii) information was proper instead. (See PSOF ¶¶ 34, 35.) If Mesquite had provided "garbage" information on the form, perhaps the Court would come to a different conclusion. Here, though, THE COURT FURTHER FINDS that Mesquite filed its annual report for tax year 2022 and did not forfeit its right to appeal the valuation pursuant to A.R.S. § 42-14152.
Further plain language of the statutes supports this conclusion. A.R.S. § 42-14152(D) states that the taxpayer forfeits its right of appeal only "[i]f the report is not filed by May 20 of the valuation year." There is no reference to the Department's agreement with the report being another prerequisite to stave forfeiture. The Court's conclusion is also consistent with the doctrine that tax statutes are to be interpreted liberally in favor of the taxpayer and strictly against the government. See Wilderness World, Inc. v. ADOR, 182 Ariz. 196, 199 (1995). Therefore, given the foregoing discussion, IT IS FURTHER ORDERED denying Defendants/Counterclaimants' Motion for Summary Judgment.
Mesquite seeks summary judgment on the Department's counterclaim. The Department's counterclaim seeks the following relief from the Court:
1) Declare that Mesquite did not file 'a report with the department, under oath, stating the information that the department requires to enable it to make a valuation of the property' as required by A.R.S. § 42-14152(A) at any time on or before May 20, 2021.
2) Declare that because Mesquite failed to file an annual report that conforms with A.R.S. § 42-14152(A) on or before May 20, 2021, it forfeited its right to contest the Department's valuation of the Subject Property for tax year 2022.(Countercl., at 4).
Given the Court's findings and Orders above, THE COURT FURTHER FINDS that dismissal of the Department's counterclaim is appropriate.
IT IS FURTHER ORDERED granting Plaintiff's Cross-Motion for Partial Summary Judgment on Defendants/Counterclaimants' Counterclaim.