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First Data Corporation v. Arizona Department of Revenue
Court of Appeals of Arizona, First Division
November 26, 2013
FIRST DATA CORPORATION; 440 INSURANCE AGENCY OF MASSACHUSETTS, INC.; 440 INSURANCE AGENCY, INC.; ACTUARIAL COMPUTER TECHNOLOGY, INC.; AMERICAN RAPID CORPORATION; APPLIED MAILING SYSTEMS, INC.; ATLANTIC BANKCARD PROPERTIES CORPORATION; ATLANTIC STATES BANKCARD, INC.; B1 PT SERVICES, INC.; BANKCARD INVESTIGATIVE GROUP, INC.; BASIN FINANCE COMPANY; BUSINESS OFFICE SERVICES, INC.; CALLTELESERVICES, INC.; CASHTAX, INC.; CESI HOLDINGS, INC.; CREDIT PERFORMANCE, INC.; DABCO COMPUTER SERVICES, INC.; DM HOLDINGS, INC.; DONNELLEY FUNDING, INC.; DONNELLEY MARKETING CONSUMER PROMOTIONS, INC.; DONNELLEY MARKETING HOLDINGS, INC.; DONNELLEY MARKETING, INC.; EASTERN STATES MONETARY SERVICES, INC.; EBP LIFE INSURANCE COMPANY; FDC INTERNATIONAL, INC.; FDC INTERNATIONAL PARTNER, INC.; FDMS/UMS PARTNER, INC.; FDR INTERACTIVE TECHNOLOGIES CORPORATION; FDR IRELAND LIMITED; FDR LIMITED; FDR MISSOURI, INC.; FDR SIGNET, INC.; FDWYCO, INC.; FIRST DATA CAPITAL, INC.; FIRST DATA COMMUNICATIONS CORPORATION; FIRST DATA DIGITAL CERTIFICATES, INC.; FIRST DATA DISTRIBUTORS, INC.; FIRST DATA INFORMATION MANAGEMENT GROUP, INC.; FIRST DATA INTEGRATED SERVICES, INC.; FIRST DATA INVESTOR SERVICES GROUP, INC.; FIRST DATA LATIN AMERICA INC.; FIRST DATA MERCHANT SERVICES CORPORATION; FIRST DATA PITTSBURG ALLIANCE PARTNER, INC.; FIRST DATA POS, INC.; FIRST DATA RESOURCES CANADA, INC.; FIRST DATA RESOURCES, INC.; FIRST DATA SERVICES, INC.; FIRST DATA TECHNOLOGIES, INC.; FIRST DATA TENNESSEE, INC.; FIRST FINANCIAL BANK; FIRST FINANCIAL MANAGEMENT CORPORATION; FSM SERVICES, INC.; HOGAN INFORMATION SERVICES COMPANY; INNOVIS DATA SOLUTIONS, INC.; INTEGRATED PAYMENT SYSTEMS, INC.; INTERNATIONAL BANKING TECHNOLOGIES, INC.; IPS CARD SOLUTIONS, INC.; IPS HOLDINGS, INC.; IPS, INC.; NA INSURANCE SERVICES, INC.; NT DISTRIBUTORS, INC.; ORLANDI VALUTA, INC.; ORLANDI VALUTA NACIONAL, INC.; PENSION MARKETING, INC.; SHARED GLOBAL SYSTEMS, INC.; SOUTHERN TELECHECK, INC.; TECHNOLOGY SOLUTIONS INTERNATIONAL, INC.; TELECHECK HOLDINGS, INC.; TELECHECK INTERNATIONAL, INC.; TELECHECK PITTSBURG/WEST VIRGINIA, INC.; TELECHECK RECOVERY SERVICES, INC.; TELECHECK SERVICES, INC.; TELECHECK SERVICES CANADA, INC.; TELECHECK SERVICES OF PUERTO RICO, INC.; UNITED STATES PENSION SERVICES, INC.; WESTERN UNION COMMUNICATIONS, INC.; WESTERN UNION FINANCIAL SERVICES, INC.; WESTERN UNION FINANCIAL SERVICES EASTERN EUROPE, LTD.; WESTERN UNION HOLDINGS, INC.; WESTERN UNION INDUSTRIAL BANK, Plaintiffs/Appellants,
ARIZONA DEPARTMENT OF REVENUE, Defendant/Appellee.
Appeal from the Superior Court in Maricopa County No. TX2009-000274 The Honorable Dean M. Fink, Judge
Steptoe & Johnson, LLP, Phoenix By Pat Derdenger, Bennett Evan Cooper Counsel for Plaintiffs/Appellants First Data Corporation and Its Combined Subsidiaries
Arizona Attorney General's Office, Phoenix By Kimberly Cygan Counsel for Defendant/Appellee
Bade Baskin Richards, PLC, Tempe By William A. Richards And Multistate Tax Commission, Washington, D.C. By Shirley Sicilian, Burce J. Fort Counsel for Amicus Curiae Multistate Tax Commission
Presiding Judge John C. Gemmill delivered the opinion of the Court, in which Judge Margaret H. Downie and Judge Peter B. Swann joined.
¶1 First Data Corporation ("Taxpayer") challenges the Arizona Tax Court's holding that gains from the sale of a wholly-owned subsidiary are business income on its Arizona combined income tax return. Taxpayer challenges the interpretation of "business income" adopted by the Arizona Department of Revenue ("Department") and the tax court. We resolved a related issue presented in Harris Corp. v. Ariz. Dep't of Revenue, 1 CA-TX 11-0006 (Ariz. App. Nov. 26, 2013) concerning the interpretation of the "business income" definition under Arizona Revised Statutes ("A.R.S.") section 43-1131(1). Taxpayer also contends that the tax court erroneously failed to give effect to the parties' election under 26 U.S.C. ("I.R.C.") § 338(h)(10). We disagree with Taxpayer's arguments, and we affirm the tax court's judgment.
¶2 Taxpayer is a Delaware corporation that maintains its corporate headquarters and domicile in Atlanta, Georgia. Taxpayer provides its customers with electronic payment services.
¶3 Taxpayer's wholly owned subsidiary, First Data Investor Services Group ("FDISG"), was a Massachusetts corporation with its headquarters in Massachusetts and operations in Minnesota, North Carolina, and Pennsylvania. FDISG provided processing services, which included transfer-agent services; fund administration; fulfillment and proxy services; and retirement-account record-keeping, and transaction services. FDISG focused on services for mutual funds, which Taxpayer characterizes as "not consistent" with Taxpayer's overall objectives.
¶4 In 1999, Taxpayer sold FDISG's stock to PNC Bank Corporation ("PNC") and realized net proceeds of approximately $725 million. Taxpayer and PNC elected to treat the sale of FDISG stock as a sale of assets by FDISG in accordance with I.R.C. § 338(h)(10). For purposes of federal income tax, FDISG was deemed to have undergone a complete corporate liquidation with the distribution of the proceeds to its sole shareholder, Taxpayer. FDISG reported the gain on its federal income tax return.
¶5 Taxpayer, FDISG, and other Taxpayer subsidiaries constituted a unitary business and filed an Arizona combined corporate income tax return for the 1999 tax year. This return reflected Taxpayer's treatment of gain on the FDISG sale as non-business income to Taxpayer.
¶6 Following an audit, the Department issued a notice of proposed assessment for $2, 749, 706.14, reclassifying the gain from the FDISG sale as business income. Taxpayer timely protested, but the Department's hearing officer ultimately upheld the portion of the assessment resulting from the FDISG sale classification.
¶7 Taxpayer appealed to the Arizona Tax Court pursuant to A.R.S. § 42-1254(C). The parties cross-moved for summary judgment on the income classification issue. The tax court granted summary judgment in the Department's favor in a ruling incorporating its statutory analysis in Harris. Consistent with that analysis, the tax court held that proceeds from FDISG were ...