1 CA-TX 00-0007



(Not for Publication -

Rule 28, Arizona Rules

of Civil Appellate


Appeal from the Arizona State Tax Court
Cause No. TX 98--00787
The Honorable Jeffrey S. Cates, Judge



Mariscal, Weeks, McIntyre & Friedlander, P.A. Phoenix
By Brian M. Mueller
Attorneys for Appellant

Janet Napolitano, Attorney General Phoenix
By Lisa A. Neuville
Assistant Attorney General
Attorneys for Appellee


L A N K F O R D, Presiding Judge

Qrmsbee Drilling Company ("Ormsbee") appeals from a tax court judgment in favor of the Arizona Department of Revenue ("ADOR"). Ormsbee challenges the courts ruling that ADOR is not equitably estopped from raising the statute of limitations. For the following reasons, we affirm.

The pertinent facts are as follows. Ormsbee, an exploratory drilling company, began its work in Arizona in 1982. When Ormsbee renewed its well drilling license in 1987, the Arizona Department of Water Resources informed Ormsbee that it needed to apply for an A-4 contractors license. Because the contractors license application required a transaction privilege tax number, Ormsbee obtained one from ADOR. Ormsbee began filing transaction privilege tax returns in April 1988.

Following a 1991 audit for the period of January 1988 through March 1991, ADOR issued an assessment against Ormsbee which resulted in a net deficiency payment of slightly more than $2,000. Ormsbee did not challenge this net tax liability.

In 1994, Ormsbee requested a refund of all tax payments from January 1988 through March 1994. Because Ormsbee had engaged exclusively in exploratory drilling, Ormsbee had not been required to pay the prime contracting tax. See Ariz. Admin. Code R15-5-628. ADOR refunded all sums except for the $17,005.73 that Ormsbee had paid between April 1988 and December 1989. Ormsbee had. filed its refund claims for that period beyond the four years allowed by Arizona Revised Statutes Annotated ("A.R.S.") sections 42-1104 and 42-1106(A) (1999).

Ormsbee appealed to the tax court. The tax court sustained ADORs refusal to refund the taxes paid from April 1988 through December 1989. It found that ADOR was not estopped from asserting the statutory limitations defense because Ormsbee s failure to timely seek a refund had not resulted from reasonable reliance on ADORs prior conduct. We have jurisdiction under A.R.S. section 12-170(C) (1992).

In reviewing the tax courts decision on equitable estoppel, we apply an abuse of discretion standard. See Jefferson Place Condominium Assn v. Naples, 708 N.E.2d 771, 776 (Ohio Ct. App. 1999). A court may abuse its discretion by committing an error of law or fact. See Grant v. Ariz. Pub. Serv. Co., 133 Ariz. 434, 455-56, 652 P.2d 507, 528-29 (1982) (supplemental opinion). Questions of law are reviewed de novo. Brink Elec. Constr. Co. v. Ariz. Dept of Revenue, 184 Ariz. 354, 358, 909 P.2d 421, 425 (App. 1995). Factual findings made by the trial court will be sustained on appeal unless they are clearly erroneous. Combs v. Dubois, 135 Ariz. 465, 468, 662 P.2d 140, 143 (App. 1982). . A finding of fact is not "clearly erroneous" if substantial evidence supports it, even in the face of conflicting substantial evidence. Moore v. Title Ins. Co. of Minn., 148 Ariz. 408, 413, 714 P.2d 1303, 1308 (App. 1985).

The doctrine of equitable estoppel may be asserted against state taxing authorities only if four required elements are established. Valencia Energy Co. v. Ariz. Dept of Revenue, 191 Ariz. 565, 576-78, 959 P.2d 1256, 1267-69 (1998). . First, a representative of ADOR with authority to act must have acted inconsistently with a later position take by ADOR.

Id. at 577, 959 P.2d at 1268. Second, the affected taxpayer must have reasonably - relied on ADORs action. Third, ADORs later repudiation of its prior action must have caused the affected taxpayer substantial detriment. Id. at 577, 959 P.2d at 1268. Finally, the proposed application of equitable estoppel against ADOR must not "unduly damage[]" the public interest or "substantially and adversely affect the exercise of governmental powers." Id. at 578, 959 P.2d at 1269.

Although the parties have addressed all four required elements of estoppel, the reasonable reliance element is dispositive. A taxpayer who relied on the States action "with a careless indifference to means of information reasonably at hand" did not rely "reasonably." Id. at 577, 959 P.2d at 1268 (quoting Suburban Pump & Water Co. v. Linville, 60 Ariz. 274, 283, 135 P.2d 210, 214 (1943)).

The tax court based its resolution of this issue on the following facts:

In December 1987, Mrs. Ormsbee wrote to ADOR that Ormsbee did not "transact any business that is subject to Sales Tax." At trial, Mrs. Ormsbee testified she had never heard of a sales tax on services.

Mr. Ormsbee assumed from the requirement that Ormsbee obtain a transaction privilege tax license that it was liable for taxes.

Ormsbee never consulted an attorney or accountant to determine if it was subject to privilege taxes.

ADOR never indicated to Ormsbee that its Arizona activities subjected it to prime contracting privilege taxes.

For all Mr. And Mrs. Ormsbee knew, the 1991 audit involved only a review of numbers. Mrs. Ormsbee assumed that the ADOR auditor was aware of the nature of their busienss, and the Ormsbees both assumed that the 1991 audit assessment was correct.

After reviewing the record, we find that the tax court did not abuse its discretion in finding no reasonable reliance. The trial transcript and exhibits contain substantial evidence that supports each of these findings, none of which Ormsbee disputes. In turn, the tax courts findings amply support its conclusion that Ormsbees failure to timely file a refund claim was not the product of "reasonable reliance" on any of ADORs statements or actions. Accordingly,the tax court did not abuse its discretion. Ormsbee contends, however, that the "presumption of correctness" that attaches to an ADOR audit assessment, Ariz. State Tax Commn v. Kieckhefer, 67 Ariz. 102, 105, 191 P.2d 729, 731 (1948), renders its reliance on ADORs assessment "reasonable" as a matter of law. We disagree. The function of the presumption is to place on the taxpayer the burden of going forward with evidence and persuading the court that an assessment is not correct. See id. at 105, 191 P.2d at 731. Therefore, taxpayers must inform themselves about the facts and the law and take prompt, affirmative action to protect their own interests. Here, Ormsbee neither informed itself of the applicable tax law nor took prompt action. As a result, Ormsbees claim that as a matter of law it reasonably relied on ADORs earlier inconsistent conduct necessarily fails. Because the tax court did not abuse its discretion, we affirm the judgment.



1996 Michael G. Galloway

Everything contained in this website is resource material only and not intended as legal advice. Case summaries are basic overviews for guidance and should not be used as a substitute for reading and analyzing the case.  If you have a legal issue regarding state or local taxation, please consult with an attorney who is experienced in the field. Sending an e-mail to does not establish an attorney-client relationship and the communication is not subject to attorney-client privilege.