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State and Local Tax

Arizona Supreme Court Allows Negative Valuation of Electric Plant

· 5 minute read

· 5 minute read

By Maria T. Albanese

The Supreme Court of Arizona held that the valuation for a reduced plant in service cost calculated under Ariz. Rev. Stat. Ann. § 42-14154(B)(2) can be negative, and that although the negative valuation does not technically “offset” the valuation of construction work in progress (CWIP), it can affect the full cash determination and reduce the overall valuation. (San Diego Gas and Elec. Co. v. Ariz. Dept. of Rev., Ariz. S. Ct., Dkt. No. CV-23-0283-PR, 01/31/2025.)

Procedural history: The taxpayer, a California electric company with lines and a plant that were in Arizona, reported to the Arizona Department of Revenue (DOR) a net “original plant in service” valuation and a net “related depreciation” that was thus resulting in a negative valuation for the original plant and then added the valuation of CWIP. The DOR disagreed with the negative value and used the full cash value, and the taxpayer appealed. The tax court granted the taxpayer’s motion and denied the DOR’s, finding that the taxpayer’s valuation correctly followed the requirements of Ariz. Rev. Stat. Ann. § 42-14154.

The DOR appealed the ruling, arguing that, the statute does not permit a negative valuation for a reduced plant in service cost, and the Arizona Court of Appeals agreed, finding nothing in the plain language of Ariz. Rev. Stat. Ann. § 42-14154 or the related valuation statutes, Ariz. Rev. Stat. Ann. 42-14151 through Ariz. Rev. Stat. Ann. § 42-14153, expressly provided for or precluded a negative full cash valuation of a plant in service. But applying a “sensible construction to avoid absurd results,” the court of appeals held that the legislature had not intended to permit a negative full cash valuation for a plant in service, and therefore held that accumulated depreciation could not reduce the full cash value of a plant in service to a negative number. The taxpayer then appealed to the Arizona Supreme Court.

Supreme court holding: The supreme court found Ariz. Rev. Stat. Ann. § 42-14154 permits a negative valuation for the reduced plant in service cost and that a negative valuation does not necessarily produce an absurd result, if for example, the cost of removal is greater than the salvage value at the time of a plant’s retirement.

Furthermore, although the taxpayer and the DOR agreed that the valuations calculated in Ariz. Rev. Stat. Ann. § 42-14154 were used to determine the full cash value of electric transmission property, the parties disagreed on whether a negative reduced plant in service cost affects the valuation of CWIP. The taxpayer argued that the property subject to valuation consists of “several components that are all summed up to arrive at a full cash value,” and therefore a negative valuation for reduced plant in service cost can “offset” the valuation of CWIP. Conversely, the DOR argued that the reduced plant in service cost and CWIP have distinct valuation methods with no relationship to each other.

The supreme court found that summing the valuations prescribed by Ariz. Rev. Stat. Ann. § 42-14154 was necessarily the way to determine the full cash value of the taxpayer’s property. Consequently, any single negative valuation for one component, when summed with the valuations of other components, would reduce the overall full cash value. However, it was incorrect to characterize the result of adding a negative valuation to one or more positive valuations as an “offset.” In Arizona’s tax statutes, an offset generally refers to a credit against a taxpayer’s tax liability. Thus, a negative reduced plant in service cost does not “offset” the valuation of CWIP as determined by Ariz. Rev. Stat. Ann. § 42-14154(C), rather it necessarily reduces the overall full cash value.

The court vacated a portion of the court of appeals’ opinion concerning a negative valuation for plant in service cost and ordered that the remainder of the opinion be depublished and affirmed the tax court’s grant of summary judgment.

 

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