Agua Caliete v. ador/yuma

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

AGUA CALIENTE SOLAR, LLC, Plaintiff/Appellant,

v.

ARIZONA DEPARTMENT OF REVENUE, et al., Defendants/Appellees.

No. 1 CA-TX 22-0007
FILED 05-14-2024

Appeal from the Arizona Tax Court
No. TX 2020-000018, TX2020-000773, TX2020-000987
The Honorable Danielle J. Viola, Judge

REVERSED AND REMANDED

COUNSEL

Frazer, Ryan, Goldberg & Arnold, L.L.P., Phoenix
By Douglas S. John, James M. Cool
Co-Counsel for Plaintiff/Appellant

Dickinson Wright, PLC, Phoenix
By Bennett Evan Cooper
Co-Counsel for Plaintiff/Appellant

Arizona Attorney General’s Office, Phoenix
By Kimberly Cygan, Jerry A. Fries
Counsel for Defendants/Appellees
 AGUA CALIENTE v. ADOR/YUMA
Opinion of the Court

OPINION

Presiding Judge Jennifer M. Perkins delivered the opinion of the Court, in
which Judge D. Steven Williams and Judge Angela K. Paton joined.

P E R K I N S, Judge:

¶1 The issue before us is whether a claimed investment tax credit
deferred as a tax asset has “value” for purposes of determining the taxable
original cost of renewable energy equipment under A.R.S. § 42-14155. We
hold that the “value” of an investment tax credit under Section 42-14155 is
the full amount of the credit, set when the applicable equipment is placed
in service and the credit is claimed. Because the Arizona Department of
Revenue (“the Department”) improperly excluded a deferred investment
tax credit from its valuation calculations, we reverse the tax court’s grant of
summary judgment in the Department’s favor, grant summary judgment
in favor of Agua Caliente Solar, LLC (“Agua Caliente”), and remand for
further proceedings consistent with this decision.

FACTS AND PROCEDURAL HISTORY

¶2 The relevant facts are not disputed. Agua Caliente operates a
solar-electricity power-generation facility (“the facility”) that uses
renewable energy equipment. See A.R.S. § 42-14155(D)(5) (defining
“[r]enewable energy and storage equipment” as “property . . . used or
useful for generating, storing, transmitting or distributing electric power,
energy or fuel derived from solar, wind or other nonpetroleum renewable
sources not intended for self-consumption, including materials and
supplies and construction work in progress”). Agua Caliente built the
facility and placed it in service in 2012. See 26 C.F.R. § 1.46-3(d)(ii) (defining
“placed in service” as the “taxable year in which the property is placed in a
condition or state of readiness and availability for a specifically assigned
function”).

¶3 From 2012 to 2015, Agua Caliente was owned by AC Solar
Holdings, LLC (“AC Solar”), which was a partnership between two
corporations, Berkshire Hathaway, Inc. (“Berkshire Hathaway”) and NRG
Energy, Inc. (“NRG Energy”). During that time, Agua Caliente received
investment tax credits in the amount of $465,454,649 from the federal
government for building the facility. AC Solar claimed the investment tax

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Opinion of the Court

credits which it then “passed through” to Berkshire Hathaway and NRG
Energy “based on their respective ownership interests” in AC Solar.
Berkshire Hathaway used its share of the investment tax credits to reduce
its corporate tax liability between 2012 and 2015. But NRG Energy, having
no taxable income against which to use the credit, carried forward its share
of the investment tax credits as a deferred corporate tax asset. See 26 U.S.C.
§ 39.

¶4 In its 2020 annual valuation report, Agua Caliente reported
the investment tax credits to the Department for the first time. The
Department initially valued Agua Caliente’s renewable energy equipment
without including any of the investment tax credits. Agua Caliente
challenged that valuation, arguing the Department should have included
the tax credits claimed by AC Solar. The Department then revised its
valuation to include Berkshire Hathaway’s share of the investment tax
credits but refused to include NRG Energy’s share.

¶5 After revising the 2020 valuation of Agua Caliente’s
equipment, the Department also amended its valuation of the equipment
for tax years 2016 through 2019 to account for Berkshire Hathaway’s share
of the investment tax credits. Dissatisfied with the Department’s refusal to
recognize NRG Energy’s share of the investment tax credits, Agua Caliente
appealed the Department’s valuations for tax years 2016 through 2019
(Case No. TX 2020-000773), 2020 (Case No. TX 2020-000018), and 2021 (Case
No. TX 2020-00987).

¶6 On cross-motions for summary judgment in those
consolidated appeals, the parties disputed how the statutory formula for
valuing renewable energy equipment accounts for investment tax credits.
While Agua Caliente argued that, by statute, investment tax credits are
recognized as soon as they are claimed, the Department maintained that the
statutory formula does not recognize investment tax credits until they are
used to reduce income tax liability.

¶7 The tax court granted summary judgment in favor of the
Department and denied Agua Caliente’s motion. After entry of final
judgment, Agua Caliente timely appealed, and we have jurisdiction. Ariz.
Const. art. 6, § 9; A.R.S. §§ 12-120.21(A)(1), -2101(A)(1).

DISCUSSION

¶8 Agua Caliente contends that the tax court misconstrued the
statutory valuation formula when it upheld the Department’s exclusion of

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NRG Energy’s proportionate share of the investment tax credits in the
revised valuation of Agua Caliente’s renewable energy equipment.

¶9 We review de novo the tax court’s rulings on the parties’
cross-motions for summary judgment. See Wilderness World, Inc. v. Ariz.
Dep’t of Revenue, 182 Ariz. 196, 198 (1995). We also review the tax court’s
interpretation of the relevant statutes de novo. Sw. Airlines Co. v. Ariz. Dep’t
of Revenue, 217 Ariz. 451, 452, ¶ 6 (App. 2008).

I. In context, the unambiguous term “value” means the full amount
of a claimed investment tax credit, even before its use.

¶10 Arizona’s property tax system tasks the Department with the
valuation of renewable energy equipment. A.R.S. § 42-14155(A). Under the
statutory formula, the Department calculates the “taxable original cost” of
the equipment by subtracting “the value of any investment tax credits . . .
applicable to the taxable renewable energy and storage equipment” from
the equipment’s “original cost.” A.R.S. § 42-14155(B), (D)(6) (emphasis
added) (defining “original cost” as actual construction and acquisition
costs). The Department then deducts any applicable depreciation from the
taxable original cost and multiplies the remaining, depreciated cost by
twenty percent, yielding the equipment’s full cash value. A.R.S. § 42-
14155(B).

¶11 To determine whether the statutory formula compels the
Department to recognize deferred investment tax credits when calculating
renewable energy equipment’s taxable original cost, we must interpret the
phrase “reduced by the value of any investment tax credits . . . applicable
to the . . . equipment.” Under Agua Caliente’s proposed construction, the
amount of any investment tax credit is subtracted once the owner places the
equipment in service and claims the credit associated with that equipment.
The Department maintains that “value” equals the economic benefit that an
equipment owner derives by using the credit to reduce income-tax liability.
Under the Department’s interpretation, a claimed investment tax credit is
not factored into the valuation of renewable energy equipment until the
credit is used to offset a federal tax liability.

¶12 “Statutory interpretation requires us to determine the
meaning of the words the legislature chose to use. We do so . . . according
to the plain meaning of the words in their broader statutory context.” S.
Ariz. Home Builders Ass’n v. Town of Marana, 254 Ariz. 281, 286, ¶ 31 (2023).
“Absent ambiguity or absurdity, our inquiry begins and ends with the plain
meaning of the legislature’s chosen words.” Welch v. Cochise Cnty. Bd. of

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Supervisors, 251 Ariz. 519, 523, ¶ 11 (2021) (cleaned up). A statute is not
ambiguous merely because both parties present plausible competing
definitions of a word in the statute. See Planned Parenthood Ariz., Inc. v.
Mayes, ___ Ariz. ___, ___, ¶ 17, 545 P.3d 892, 898, ¶ 17 (2024) (“A statute is
not ambiguous merely because the parties disagree about its meaning.”);
see also Honigman v. City of Detroit, 505 Mich. 284, 307 (2020); Brett M.
Kavanaugh, Fixing Statutory Interpretation, 129 Harv. L. Rev. 2118, 2163
(2016) (reviewing Robert A. Katzman, Judging Statutes (2014)) (courts
should “find the best reading of the statute by interpreting the words of the
statute, taking account of the context of the whole statute”). Rather, a statute
is ambiguous if it is susceptible to “multiple reasonable interpretations . . .
after examining the statute’s text as a whole.” Qasimyar v. Maricopa Cnty., 250 Ariz. 580, 584, ¶ 6 (App. 2021) (emphasis added).

¶13 Arizona’s property tax statutes do not define “value,” but its
meaning is clear when considering the plain meaning of the relevant text.
See A.R.S. § 42-14155. Both parties advance plausible interpretations of the
word value in isolation, but only Agua Caliente’s interpretation is a
reasonable interpretation of the statute as a whole. The Department’s
interpretation—that NRG Energy’s share of the investment tax credits has
no value for purposes of valuing renewable energy property until it uses
the credit to offset a federal tax liability—is not supported by the plain
meaning of the statute, flies against the context of the statute, and runs
contrary to general property law principles. See A.R.S. § 42-14155.

¶14 Given its plain meaning, value is best defined here as the
monetary worth of the investment tax credits. Both parties agree with this
general definition, but diverge in whether the deferred credits have
monetary worth before NRG Energy uses the credits to offset a federal tax
liability. Pointing out that Section 42-14155(D)(6) addresses the taxable
original cost of renewable energy equipment, Agua Caliente argues the
monetary worth is the full amount of the claimed credits, set when Agua
Caliente placed the equipment in service and claimed the credits. Zeroing
in on the word “value” in isolation, the Department urges that because the
credits are not transferrable and cannot be sold, they have “[no] monetary
worth apart from [their] specific use.”

¶15 A plain reading of the text supports Agua Caliente’s
interpretation: an investment tax credit’s monetary worth, and thus its
value, is the full amount of the credit claimed, even before its use. Value in
this context “appli[es] to the . . . equipment,” not Agua Caliente’s upline
owner NRG Energy. A.R.S. § 42-14155(D)(6). So whether NRG Energy

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derives its share of the tax savings from the credits is immaterial to the
valuation of Agua Caliente’s property.

¶16 No plain understanding of the statute’s text as a whole
supports the Department’s interpretation. Relying on unrelated case law,
the Department proposes that tax credits amounting to over $400 million
have no monetary worth until the owner derives “an actual economic
benefit” from the credits. See Randall v. Loftsgaarden, 478 U.S. 647, 657 (1986)
(tax credits do not qualify as “income received” from a purchase of
fraudulent securities); Hargroder v. Hargroder, 682 So.2d 999, 1001 (La. App.
1996) (finding an unused tax credit is not relevant to a child support
determination). But this line of reasoning, while plausible in the context of
determining whether tax credits qualify as income, is untenable in the
context of Section 42-14155. These cases—and others that follow this line of
reasoning—suggest that even the use of a tax credit to offset a tax liability
is not an economic benefit to the taxpayer because there is no accession to
wealth. See, e.g., Randall, 478 U.S. at 657 (“we would require compelling
evidence before imputing to Congress an intent to describe the tax benefits
an investor derives from tax deductions or credits attributable to ownership
of a security as ‘income received thereon’”); Tempel v. Comm’r, 136 T.C. 341,
350–51 (2011) (courts “treat government-granted rights as capital assets”
rather than income because there is no “accession to wealth”); Rev. Rul. 79-
315, 1979-2 C.B. 27 (IRS RRU 1979) (tax rebates used to offset tax liability
are not “includible in the individual’s gross income”). The case law on
which the Department relies does not support the proposition that deferred
investment tax credits have no monetary worth in determining renewable
energy equipment’s taxable original cost.

¶17 Moreover, the word value does not exist in a vacuum, but is
instead embedded in the definition of “taxable original cost.” See A.R.S. §
42-14155(D)(4), (6) (emphasis added) (original cost is set at the acquisition
or construction of the equipment). Under the Department’s interpretation,
the statute would treat tax credits like depreciation deductions which are
subject to change every year. But this is not supported by the statute.
“Taxable original cost” is a separate, threshold definition which is not
subject to change unless the equipment owner acquires additional property
or claims additional tax credits. A.R.S. § 42-14155(D)(6). Importantly, this
definition still includes the word original. The Department supposes that
the taxable original cost of Agua Caliente’s equipment should be modified
regularly as NRG Energy uses the credits to offset its federal tax liability.
We disagree; the word original dictates that the value of a tax credit is fixed
upon acquisition of the credit rather than being deducted as it is used.

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¶18 The Department also erroneously analogizes the monetary
worth of a deferred tax credit with the monetary worth of a judgment
against an individual who files a no-asset bankruptcy proceeding. The
Department states that “a judgment that is not collectable,” like that against
an individual in a no-asset bankruptcy proceeding, does not have the same
“value” as a judgment against an individual that has sufficient assets to
satisfy the judgment. Following this line of reasoning, the Department
suggests that a deferred tax credit does not have the same “value” as one
that has been used to offset a tax liability. Although NRG Energy is yet to
use its share of the credits to offset its federal income tax liability, it still can
use the credits when it elects to do so. See 26 U.S.C. § 38(a). These investment
tax credits may be carried forward up to 20 years without losing any of their
monetary worth. 26 U.S.C. § 39(a)(1)–(2). A deferred investment tax credit
is not analogous to a non-collectible judgment.

II. The Arizona Constitution and general principles of Arizona
property law support uniformly valuing renewable energy
equipment regardless of the owner’s income.

¶19 In its reply brief, Agua Caliente argues the Department’s
proposed interpretation of Section 42-14155 may open potential violations
of the Uniformity Clause of the Arizona Constitution. At oral argument
before this Court, the Department maintained this argument was waived
because Agua Caliente did not address the issue in its opening brief. But
Agua Caliente raised this argument in rebuttal to the following argument
in the Department’s answering brief: “Several Arizona statutes and even
Arizona’s Constitution provide for different tax treatment of properties for
property tax purposes depending on the owner’s tax status or income
level.” ARCAP 13(c) (a reply brief “must be strictly confined to rebuttal of
points made in the appellee’s answering brief”). Because the Department
raised the issue of whether the Arizona Constitution allows the legislature
to set different property tax rates based on the owner’s income, we will
exercise our discretion to consider Agua Caliente’s responsive argument to
the extent that it informs our plain reading of the statute.

¶20 In relevant part, the Arizona Constitution provides, “all taxes
shall be uniform upon the same class of property.” Ariz. Const. art. 9, § 1.
Not all property must be taxed at the same rate, but “property of the same
character must be taxed the same.” In re Am. W. Airlines, Inc., 179 Ariz. 528,
531 (1994). And property tax classifications must be reasonable and “rest
upon real differences” in the property. Id.

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¶21 “For tax purposes, Arizona values property at its ‘full cash
value.’” Maricopa Cnty. v. Viola, 251 Ariz. 276, 278, ¶ 9 (App. 2021). While
“‘full cash value’ generally means ‘fair market value,’” id. (cleaned up), the
Department determines the full cash value of taxable property in
accordance with statutory methods provided depending on the type of
property, see A.R.S. § 42-14151 to -14159. Under Arizona’s property tax
system, “it is the property that owes the tax, and not the owner.” Santos v.
Simon, 60 Ariz. 426, 429 (1943). In other words, “[t]he owner of real property
is not personally liable for real property taxes; such taxes represent a lien
against the land itself and are not a personal obligation of the property
owner.” Peabody Coal Co. v. Navajo Cnty., 117 Ariz. 335, 338 (1977),
disapproved of on other grounds by U.S. W. Commc’ns, Inc. v. Ariz. Dep’t of
Revenue, 199 Ariz. 101 (2000); Santos, 60 Ariz. at 429 (“The whole proceeding
to collect taxes is in rem.”). Arizona’s property tax system is ad valorem
because the state does not implement a “personal taxation[,] but rather [] a
tax against the property as a thing.” U.S. v. Allegheny Cnty., 322 U.S. 174,
184 (1944), abrogated by U.S. v. City of Detroit, 355 U.S. 466 (1958).

¶22 Nonetheless, the Department suggests that the legislature
may have intended to value identical renewable energy equipment
differently based on the income level of its owner. But this runs afoul of the
basic tenets of Arizona’s property tax system. Under the Department’s
interpretation, the property tax owed on renewable energy equipment
would depend on the owner’s federal income tax liability. The Department
supposes the legislature imposed a greater property tax on equipment
whose owner has zero taxable income than on equipment whose owner has
billions of dollars in taxable income for no reason other than that the owner
has a greater income. This result alone illustrates the unreasonableness of
the Department’s position. It would impose “nonuniform taxes on identical
property used for the same purpose by owners in the same industry” based
only on the owner’s taxable income. See In re Am. W. Airlines, Inc., 179 Ariz.
at 530. This is contrary to the ad valorem nature of Arizona’s property tax
system. See id. at 531–32.

¶23 The Department invokes property tax exemptions for non-
profit entities and the Arizona Constitution’s “senior freeze” provision to
try to illustrate that the legislature can set property taxes based on the
property owner’s income level. See Ariz. Const. art. 9, § 18(7) (a property’s
value cannot increase if the owner is an individual aged 65 or older whose
total income does not exceed 400% of the supplemental security income
benefit rate that the Social Security Act’s section 1611(b)(1) establishes);
A.R.S. § 42-11105(D) (non-profit healthcare providers exempt from federal
income tax are also exempt from Arizona property tax). But constitutional

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provisions protecting the elderly and statutes affording tax breaks to non-
profit healthcare providers are reasonable ways to differentiate between
property owners. See In re Am. W. Airlines, Inc., 179 Ariz. at 531. But whether
similarly situated property owners have sufficient income to use a tax
credit, is not. See id. at 531–32.

¶24 These general principles of Arizona property law provide
additional support for Agua Caliente’s interpretation of Section 42-14155.
The statutory valuation of renewable energy equipment should not be
dependent on the income level of the equipment’s owner as the Department
suggests.

¶25 The plain text of Section 42-14155 is not susceptible to
multiple reasonable interpretations. An investment tax credit’s value, for
the purpose of valuing renewable energy equipment, is the full amount of
the claimed credit, regardless of whether it has been used to offset a tax
liability.

CONCLUSION

¶26 We reverse the tax court’s grant of summary judgment in the
Department’s favor and grant summary judgment in favor of Agua
Caliente. We remand to the tax court to assess Agua Caliente’s renewable
energy equipment for tax years 2016 forward consistent with this decision.
Agua Caliente has requested an award of attorneys’ fees and costs incurred
on appeal pursuant to Section 12-348(B) (“a court may award fees and other
expenses to any party . . . that prevails by an adjudication on the merits in
an action brought by the party against this state . . . challenging . . . [t]he
assessment . . . of taxes”). Because Agua Caliente has prevailed on appeal,
we grant its reasonable attorneys’ fees and costs upon compliance with
ARCAP 21.

AMY M. WOOD • Clerk of the Court
FILED: TM

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