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Calpine Construction Finance Co. v. Arizona Department of Revenue - 4/16/2009

Arizona Court of Appeals Division One Holds That Tribe’s Tenant Owned Improvements Made on Leased Land and Therefore Improvements Are Subject to Taxation.


Calpine Construction Finance Co. (“Calpine”) entered into a long-term lease with the Fort Mojave Indian Tribe under which Calpine leased raw trust land from the Tribe in order to build an electric power plant.  Under the lease, all improvements made to the land were Calpine’s property, and the lease authorized Calpine to remove inventory and personal property when the lease terminated.  Furthermore, in the event of condemnation, the lease provided that Calpine would receive compensation for the improvements.  The Arizona Department of Revenue (“ADOR”) assessed property taxes on the improvements and personal property, and alleged that all its valuations included only Calpine’s property.  Calpine sued ADOR and the County in Arizona Tax Court to receive a refund of the taxes already collected.  After cross-motions for summary judgment, the tax court denied Calpine’s motion and granted ADOR’s.  Calpine appealed on the question whether the improvements and personal property are subject to taxation.  In addition, Calpine also appealed the tax court’s decisions to strike the citation of two unpublished decisions and to strike the admission of a photograph of the power plant.

Judge Irvine, writing for a unanimous court, upheld the tax court’s finding that the personal property and improvements were subject to taxation.  According to the Court, the “central issue” was “whether Calpine or the Tribe owns the improvements,” because ADOR could not tax the improvements if the Tribe owned them.  The Court explained that the general rule is that when a tenant builds permanent structures on real property, the structures become property of the land owner.  Arizona law, however, allows parties to agree to depart from the general rule by expressly agreeing that the tenant owns any improvements.  Turning to the terms of Calpine’s lease, the Court concluded that Calpine owns the improvements.  First, the Court noted that the lease expressly stated that the improvements were Calpine’s property.  Indeed, the lease stated that Calpine would receive the value of the improvements in the event the land was condemned.  Moreover, Calpine did not pay rent for the improvements.  Second, after a modification, the lease granted Calpine power to remove or replace improvements during the lease.  Although improvements were to stay on the land when the lease terminated, the Court held that this level of control meant that Calpine owned the improvements.  Finally, the Court rejected Calpine’s argument that because the Tribe would keep the improvements after the lease ended, the Tribe was the true owner of the improvements.  The Court held that Calpine could be taxed because Calpine maintained present ownership under the lease.

The Court next upheld the tax court’s decision to strike its citation to unpublished tax court opinions.  First, the Court explained the general rule that unpublished decisions should not be cited.  If collateral estoppel applies, however, the court may rely on the unpublished decision.  The Court held that collateral estoppel did not apply because (1) the same issues were not litigated in either of the unpublished decisions, and (2) “offensive” collateral estoppel may not be used against the government.  Finally, the Court upheld the decision to strike the power plant photograph because Calpine waived the issue by not responding to ADOR’s motion to remove admission of the photograph.

Judge Irvine authored the opinion; judges Winthrop and Hall concurred.

Posted On: 4/23/2009