IN THE COURT OF APPEALS
STATE OF ARIZONA
CITY OF PHOENIX, a municipal corporation,
1 CA-TX 97-0002
MEMORANDUM DECISION -
(Not for Publication - Rule 28, Arizona Rules of Civil Procedure)
Appeal from the Arizona Tax Court
AFFIRMED IN PART; REVERSED IN PART; REMANDED
Newmark Irvine, P.A.
Roderick G. McDougall, City Attorney
G R A N T, Judge
The City of Phoenix ("the City") assessed privilege license taxes on sums it attributed to Arcon Construction Co. ("Arcon") as gross income from the construction contracting business. Arcon sought a refund of those taxes in the tax court. The tax court granted summary judgment to the City and Arcon appeals to this court. For reasons set forth in this decision, we affirm in part, reverse in part and remand.
FACTS AND PROCEDURES BEFORE THE TAX COURT
At all times relevant to this litigation, Arcon was engaged in the construction business. It acted as either a general contractor or a construction manager, depending on its agreement with the project owner. Its president was, and is, Leroy Paller.
In the mid-1980s, Arizona Natural Resources, Inc. ("ANR") engaged Arcon as general contractor to improve and expand its existing cosmetics manufacturing facilities. ANR was very pleased with the quality of Arcon's contracting services.
Due to business troubles, both Paller and Arcon ended the 1980s in poor financial condition. In the early 1990s, George Dembow, ANR's president, told Paller that ANR was planning to build a new manufacturing facility on land it owned in Phoenix ("the project"). ANR planned to use its own funds instead of obtaining a construction loan.
On July 10, 1996, Paller and Dembow filed virtually identical affidavits in the tax court. According to these affidavits, Dembow wanted Arcon to work on the project because of ANR's earlier positive experience with Arcon. Neither Dembow nor Paller, however, wanted ANR's project funds in Arcon's hands where they might be delayed or appropriated by Arcon's or Paller's creditors. ANR and Arcon both feared that unpaid subcontractors on the project might record construction liens that would affect ANR's credit rating. According to Paller Affidavit No. 2, Arcon did not wish to jeopardize its long-standing relationships with many of the contractors who had been hired for the project. Arcon wanted nothing, including its own penury, to interfere with the subcontractors receiving payment.
According to the affidavits, to avoid this danger but still enable ANR to take advantage of Arcon's experience and expertise, ANR and Arcon entered into an oral contract through Dembow and Paller by which
According to the affidavits, the oral contract also-contained these elements:
Arcon applied for and obtained City building permits as "contractor" to ANR, the project's "owner." Arcon entered into written agreements with the other contractors on the project using AIA Document A401, entitled "Standard Form of Agreement Between Contractor and Subcontractor, 1987 Edition." In each, ANR was identified as the owner, Arcon as the contractor, and the other contractor as the subcontractor. The agreements were executed by representatives of Arcon and each "subcontractor." In July 1991, Arcon gave "subcontractor" Ace Asphalt a document entitled "Sales Tax-Contracting Classification / Exemption Certificate." In it Arcon certified: ". . . I am the prime contractor for the work performed by you (Ace Asphalt of Arizona, Inc.) for the above company. I understand that I am required by the sales and use tax law to report and pay for the tax, as measured by current law."
At some point not specified in the record, a "Specimen Prime Contract" between ANR as "owner" and Arcon as "contractor" was prepared on AIA Document A11, entitled "Standard Form of Agreement Between Owner and Contractor, 1987 Edition." It reflected a guaranteed maximum price of $3 million. Neither ostensible party executed this form of agreement. The specimen prime contract was provided to each of the "subcontractors" on the project. Arcon contends, and the City acknowledges, that the specimen prime contract was not the agreement between Arcon and ANR, and that their only agreement was oral. The project was substantially completed by August 1992, when ANR's manufacturing business began occupying it.
Arcon did not report any sums that ANR paid directly to contractors on the project as part of Arcon's gross income from contracting for Phoenix privilege tax purposes. Arcon reported and paid taxes only on its flat fee as ANR's agent and construction manager, and on its receipts for performing minor contracting tasks on the project.
In early 1993 the City audited Arcon. The City concluded that Arcon had been the project's general contractor, and was responsible for Phoenix contracting privilege license taxes on ANR's total project disbursements of $3,081,076.96. Thus, the City assessed an additional $20,711.45 against Arcon, with interest. After resorting to and exhausting its administrative remedies before the City, Arcon brought this action in the tax court under Phoenix City Code ("P.C.C.") section 14-575(c).
The parties both moved for summary judgment. The City filed a "Second Statement of Facts" with its combined reply in support of its motion for summary judgment and response to Arcon's cross-motion. Attached was an affidavit signed and sworn by Paller on January 31, 1995, concerning the ANR project ("Paller Affidavit No. 1"). Its pertinent provisions were:
Arcon moved to strike Paller Affidavit No. 1, and all the City's arguments and statements of facts based on it, on the theory that it was filed in the tax court in violation of the confidentiality provisions of Arizona Revised Statutes Annotated ("A.R.S.") section 42-108 and P.C.C. section 14-510. The tax court denied Arcon's motion to strike and motion for summary judgment, and granted summary judgment for the City.
In its ruling, the court concluded that Paller Affidavit No. 1 was not within "the confidentiality statute," noting, "Perhaps there should be a protective order, but none has been requested." The court observed that, at the close of oral argument on the summary judgment motion, the parties had "agreed that there were no more facts to present and that if the case went to trial neither party would have more facts to present." It further stated that the City had admitted at oral argument that the pleadings contained factual conflicts but had argued that none were material. It ruled:
From formal judgment entered in accordance with the tax court's ruling, Arcon commenced this appeal. We have jurisdiction pursuant to A.R.S. section 12-2101(B) (Supp. 1996). The appeal is assigned to Department T of this court pursuant to A.R.S. sections 12-120.04(G) and 12-170(C).
The City and Arcon agree that one of the issues presented is:
They disagree on the proper characterization of a second issue. Arcon says it is
The City characterizes the issue as
Our review of the briefs and record convinces us that each party's statement of the remaining issue is rooted in one or the other of two opposing bodies of evidence bearing on the actual dispositive issues:
We address the dispositive issues in their logical order.
Discharge of Taxpayer's Indebtedness as Gross Income
Arcon contends the tax court erred in applying the doctrine of "constructive receipt" to hold that ANR's payment of sums billed by the other contractors who worked on the project constituted gross contracting income to Arcon. Arcon argues first that the tax court ignored the agreement between Arcon and ANR under which Arcon, as "construction manager," owed nothing to the project's contractors, who were to be paid directly by ANR as "owner-builder" in effect. Arcon also urges that the doctrine of "constructive receipt" as analyzed by Arizona State Tax Comm'n v. Reiser, 109 Ariz. 473, 512 P.2d 16 (1973) was inapplicable in this case. The City responds that Arcon was legally responsible for paying the project contractors on the contracts it made with them. The City contends that ANR's direct payments to them thus constituted "reduction of or forgiveness of indebtedness" to Arcon squarely included within Arcon's "gross income" as defined by P.C.C. section 14-200(a)(3).
Arcon's reliance on Reiser is based on the supreme court's observation that the constructive receipt doctrine developed in federal law "for the purpose of preventing a cash-basis taxpayer from avoiding the realization of income by deliberately refusing to receive it." 109 Ariz. at 477, 512 P.2d at 20. Arcon distinguishes this case from Reiser on the ground that federal income tax is immaterial here, and that the tax court had no evidence that Arcon avoided realizing income by deliberately refusing it.
Arcon is mistaken. It reads Reiser far more narrowly than is reasonable. Reiser concerned the tax treatment of sums, withheld from salaries paid by educational institutions through agreement with the employee, and invested in an annuity contract payable to the employee in the future. The supreme court faced the narrow question of whether, for state
income tax purposes, those sums were nevertheless included in the employee's gross income on the theory that they were "constructively received." Id.
Contrary to Arcon's intimation, the Reiser court nowhere held that the constructive receipt doctrine may be applied only to foil cash-basis taxpayers, deliberate attempts to avoid realizing taxable income. It is doubtful that the taxpayer in Reiser could be characterized as having committed such actions. Furthermore, that question played no part in the Reiser court's conclusion that the doctrine of constructive receipt was inapplicable. The court explained in part:
109 Ariz. at 478, 512 P.2d at 21. The Reiser court concluded that the constructive receipt doctrine was inapplicable because an employee's salary reduction agreement wholly eliminated his present right to receive the amount of the agreed reduction. Id. at 478-79, 512 P.2d at 21-22.
In contrast, if ANR and Arcon in fact had an owner-contractor relationship on the project, then Arcon would have had a present contractual right to receive payments from ANR as it completed work on the project. In discharging Arcon's contractual indebtedness to a subcontractor by paying the subcontractor directly, ANR accomplished precisely the same result as it would have if it had paid that amount to Arcon on the prime contract and Arcon had then applied the money to its own indebtedness under the subcontract. Either way, Arcon "received" ANR's payment, directly or "constructively," and realized gross income in that amount from the prime contract.
This analysis is fully consistent with the Phoenix City Code. The definition of "gross income" in P.C.C. section 14-200 is expansive and nonexclusive. See footnote 3, above. If a creditor's "reduction of or forgiveness of indebtedness" can be gross income to his debtor, P.C.C. section 14-200(a)(3), then under the same underlying principle an obligor's payment to a third party in discharge of an indebtedness of his obligee can be gross income to the obligee. Cf. P.C.C. § 14-220 (tax collector shall disregard transaction undertaken artificially to evade privilege license taxes).
Does Arcon's View of the Facts Necessarily Entail Arcon's Tax Liability?
The tax court ruled that even under the facts as presented by Arcon, Arcon acted as a "contractor" on the project and was liable for privilege taxes on all sums ANR paid to other contractors. The City asks us to affirm the judgment on that ground.
The City supports the tax court's ruling on two theories. First, it contends that "any person receiving consideration for the general supervision and/or coordination of . . . a construction project" is a "construction contractor" pursuant to the second sentence of P.C.C. section 14-100, even though that person does not actually "construct, repair, . . . improve, . . . or demolish any building. . . . excavation, or other structure, project, development, or improvement to real property," or agree or offer to do so, within the first sentence of that section.
We cannot agree. Initially, we question under Arcon's most recent version of the facts whether Arcon can be characterized as having "generally supervised or coordinated" the project within the second sentence of P.C.C. section 14-100. As Arcon stated in support of its motion for summary judgment, its function "was basically to assist the Owner [ANR] in choosing the contractors, keeping the records and acting as the Owner's eyes and ears on the job." At least under its own view of the facts, Arcon did not "supervise" or "coordinate" the project. It merely notified ANR when contractors on the project had completed work entitling them to payments for which they had billed, and assisted ANR in acting as its own general contractor on the project.
Additionally, the City's expansive interpretation of the definition of "construction contractor" in P.C.C. section 14-100 is inconsistent with the City Council's own Regulation 14-415.1. It provides in part:
The regulation refers to contracting as equivalent to "performing improvements to real property." This, together with the structure of the "construction contractor" definition in P.C.C. section 14-100 itself, supports a sounder interpretation of that classification than the City offers. On its face, the first sentence of the definition specifies what the term "construction contractor" means. It means "a person who undertakes to or offers to undertake to, or does himself or by or through others, construct, improve, demolish any building, excavation, or other structure. . . . or improvement to real property . . . ."
The second sentence of P.C.C. section 14-100 does not purport to expand or modify the meaning of "construction contractor." Instead, it encompasses, for the sake of clarity the names of particular functions associated with the building industry that that term "includes" when the function itself fits within its "meaning." To hold that a person who is paid to supervise or coordinate a construction project is a "construction contractor" even though he engages in none of the activities that comprise the "meaning" of that term, would create a logical discontinuity between the occupation of supervising or coordinating construction projects and the occupations of subcontractors, specialty contractors, and prime contractors, also listed in the second sentence of the paragraph, whose activities in those capacities will necessarily fall within the definition in the first sentence.
Furthermore, it would entail the counter-intuitive conclusion that any construction manager who assists an owner-builder on a project but is not responsible for performing the improvement work or completing the project is nevertheless taxable as a construction contractor. We thus interpret the second sentence as clarifying that a person whose business activities fall within those specified in the first sentence of P.C.C. section 14-100 will be deemed a "construction contractor" even if his function may be commonly referred to by one of the related, but different, names specified in the second.
The City also contends that, if Arcon was acting on ANR's behalf as agent for an undisclosed principal when it entered into subcontracts for work on the project, the law of agency rendered it liable on those subcontracts. The City concludes, "all of the payments made by the Owner to the subcontractors which reduced the liability of Arcon were gross income to Arcon and Arcon was taxable pursuant to Phoenix City Code Section 14-415."
We assume for the purpose of analysis that the City correctly cites and applies the law of agency to this hypothetical. See Restatement (Second) of Agency § 322 (1958). The first part of the City's conclusion -- that ANR's discharge of Arcon's contractual obligations to the subcontractors constituted gross income to Arcon would certainly follow under our analysis of constructive receipt, above. The second part that Arcon was therefore taxable under P.C.C. section 14-415 would not.
Receiving gross income is only one element of Phoenix privilege license tax liability. Another is that the taxable business activities generate gross income -- in this case, construction contracting. P.C.C. § 14-415(a) Establishing Arcon's assumed liability as a party to the "subcontracts" demonstrates nothing about the nature of the business activities Arcon actually conducted in exchange for payments from ANR. We would have to resolve that question before establishing Arcon's liability for contracting privilege taxes.
If we were to accept Arcon's latter version of the relationships among ANR, the subcontractors and itself, as the tax court did, then Arcon acted only as a construction manager for an owner-builder who retained full responsibility for completion of the project. Arcon's version may well be subject to refutation, but not through the "undisclosed agent" theory alone.
Admissibility of Paller Affidavit No. 1
Turning to the City's version of the relationships among ANR, the subcontractors and itself, Arcon urges that the tax court erred in declining to strike Paller Affidavit No. 1 as "confidential information" the City obtained from the Department of Revenue ("DORI") pursuant to A.R.S. section 42-108(D)(8) (Supp. 1996 ) and then "made . . . public" in violation of P.C.C. section 42-108(B) and P.C.C. section 14-510. Arcon proclaims in addition:
For several reasons, we are unable to share this view.
A.R.S. section 42-108(D)(8) (Supp. 1996) authorizes DOR to disclose to city or town taxing authorities "confidential information" concerning transaction privilege taxes, that relates to a taxpayer who is or might be taxable by the city or town. The evident purpose of this authorization is to facilitate assessing and collecting city and town excise taxes. The legislature would have been well aware that this endeavor would regularly entail litigation before the tax court. It would have contemplated that the city or town receiving such information would and could use it as evidence in litigation of that kind.
Concededly, P.C.C. section 14-510 contains no express provision permitting information about taxpayers, business, financial affairs or operations to be "made known" by using it as evidence in judicial proceedings. However, interpreting P.C.C. section 14-510(a) so broadly as to preclude the use of audit and investigative information as evidence would cripple three other significant provisions of the Phoenix City Code:
The Phoenix City Council plainly had no such outcome in mind when it adopted P.C.C. section 14-510(a). The prohibition against "making known" confidential information cannot have been intended to extend to authorized judicial proceedings. Thus, the City's use of Paller Affidavit No. 1 did not violate P.C.C. section 14-510.
Apart from the question whether the State or City's confidentiality provisions were violated, we reject Arcon's presupposition that relevant information released or used in violation of A.R.S. section 42-108 or P.C.C. section 14-510 must necessarily be excluded from evidence. Although Arcon does not use the term, the legal right of a person to prevent the revelation of otherwise material and relevant evidence is an evidentiary "privilege." 11 Morris K. Udall, Joseph M. Livermore, et al. , Arizona Practice - Law of Evidence, §71, p. 123 (3d Ed. 1991) ("Udall"). According to Udall, the once-prevailing sense of obligation to ensure correct resolution of legal disputes has diminished in recent years, and there has been a concomitant effort to expand privileges legally as a way to elevate and support specific relationships deemed worthy of encouragement or protection. Udall observes that legislatures have followed these trends more readily than courts. See Id. at 124-25.
Nevertheless, Arcon's claim of privilege here has as yet commanded no helpful legislative support. Neither A.R.S. section 42-108 nor P.C.C. section 14-510 purports to establish an evidentiary privilege. Arcon calls to our attention no other relevant provision of P.C.C. or A.R.S. that does so. Our own research has likewise yielded no such provision.
Moreover, Arcon expends little effort to convince us that its claim of privilege is necessary to protect its legitimate business interests. In fact, we may infer from this record that Arcon was actually quite unconcerned over any potential harm to its business interests caused if Paller Affidavit No. 1 remained accessible through the public record of this case. As the tax court stated, "[p]erhaps there should be a protective order, but none has been requested." The sole relief Arcon sought was to suppress Paller Affidavit No. 1 and all references to it, thus removing it not so much from public view as from consideration by the tax court.
No existing statutory or case-law evidentiary privilege of which we are aware would justify any such relief in this case. Legitimate concerns for continuing confidentiality can be addressed by other means. See generally Arizona Portland Cement Co. v. Arizona State Tax Ct., 185 Ariz. 354, 916 P.2d 1070 (App. 1995) (tax court abused discretion in ordering taxpayer to turn over to Pima County certain business records and information about its operations without also granting requested order protecting them from public disclosure). Cf. A.R.S. § 42-108(J) (Supp.1996) (providing criminal sanctions for violations). Udall states:
Udall at 128-29. Accordingly, we find the tax court did not err in denying Arcon's motion to strike Paller Affidavit No. 1.
Appropriateness of Summary Judgment for City of Phoenix
The parties filed cross-motions for summary judgment. At the hearing on these motions, both parties told the tax court they had no other facts to present if the case went to trial. On appeal, the City asks us to affirm the judgment entered in its favor, and Arcon asks us to reverse and remand for entry of summary judgment for the relief sought.
The issue underlying this litigation was and is whether Arcon received the disputed sums in return for providing business services to ANR that legally constituted "construction contracting." We cannot resolve that issue absent a factual determination by the tax court of the true nature of Arcon's actual duties and actions under its oral contract with ANR. No such determination has been made. Paller Affidavit No. 1 globally contradicts Dembow and Paller's tax court affidavits. Inferences contrary to the substance of those affidavits can also be drawn from the subcontracts between Arcon and the subcontractors, and from Arcon's issuance of a contracting tax exemption certificate to one subcontractor.
We need not and will not grant one or the other side's requested disposition on appeal. A proceeding on cross-motions for summary judgment is not designed to resolve issues of fact. A summary judgment proceeding is not a substitute for trial even in the interest of administering justice efficiently. See Nicoletti v. Westcor, Inc., 131 Ariz. 140, 142, 639 P.2d 330, 332 (1982). As Professor Jeffrey W. Stempel states in Moore's Federal Practice, (3d Ed. 1997), section 56.10, at 56-77 to 56-78:
We affirm the judgment to the extent it held that discharge of a taxpayer's indebtedness to a third party as compensation for business activities subject to Phoenix privilege license taxation constitutes gross income from the taxable business. However, there has been no factual determination that what happened in this case constitutes such action. We also affirm the judgment to the extent it declined to exclude Paller Affidavit No. 1 and any argument or reference thereto. Otherwise we reverse the judgment and remand the matter to the tax court for factual determinations and further proceedings consistent with this decision.