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                              ARIZONA INDIVIDUAL INCOME TAX RULING

                                                          ITR 97-1

                              (Effective for Taxable Years Beginning After 12/31/96)

                              (Supersedes ITR 90-1 and ITR 93-14)

This substantive policy statement is advisory only. A substantive policy statement does not include 
internal procedural documents that only affect the internal procedures of the agency and does not 
impose additional requirements or penalties on regulated parties or include confidential information or 
rules made in accordance with the Arizona administrative procedure act. If you believe that this 
substantive policy statement does impose additional requirements or penalties on regulated parties 
you may petition the agency under Arizona Revised Statutes § 41-1033 for a review of the statement.

ISSUE:

Composite Individual Income Tax Returns

Is a composite individual income tax return of nonresident individual shareholders of an S 
corporation and nonresident individual partners of a partnership acceptable for Arizona income 
tax purposes in lieu of each such shareholder or partner filing a separate Arizona individual 
nonresident income tax return?

APPLICABLE LAW:

Arizona Revised Statutes (A.R.S.) § 42-104(1) authorizes the department to formulate policies, 
plans and programs to effectuate the missions and purposes of the department.

A.R.S. § 43-301 sets forth the individual filing requirements.

A.R.S. § 43-1091 defines "gross income" of a nonresident.

A.R.S. § 43-1092(B) provides that any income received by nonresidents which is derived from 
a small business corporation making an election pursuant to A.R.S. § 43-1126 is considered 
taxable income of this state.

A.R.S. § 43-1094 defines "adjusted gross income" of a nonresident.

A.R.S. § 43-1095 defines "taxable income" of a nonresident.

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Arizona Administrative Code (A.A.C.) rule R15-2-1091(A)(2) provides that the gross income of 
a nonresident who is a member of a partnership includes the member's distributive share of 
the net income of the partnership to the extent that the member's distributive share is derived 
from sources within Arizona.

DISCUSSION:

Arizona laws do not directly address the issue of composite individual income tax returns. 
However, authority for the department to allow and to accept the subject composite return is 
implied in the general powers and duties of the department.

The laws cited under Applicable Law (above) provide statutory basis for requiring certain 
information to be included in a composite return.

RULING:

The Arizona Department of Revenue will accept a composite return of the qualifying 
nonresident shareholders of an S corporation or of the qualifying nonresident individual 
partners of a partnership if all the conditions specified below are met:

1. Members included in the composite return must be nonresidents of the state for 
the full taxable year.

2. Members included in the composite return must have no income (including 
spouse's) from sources within the state other than his or her distributive share of 
corporate or partnership income allocable to Arizona. Members of two or more 
affiliated partnerships which have received permission from the department to 
report the income from those partnerships to Arizona on one composite return will 
not be considered to have Arizona income from more than source.

3. Deceased members may not be included in the composite return.

4. All members included in the composite return must have the same tax year for 
income tax purposes.

An affidavit stating that the member qualifies for inclusion in a composite return under (1) 
through (4) above must be executed by each member included in the composite return. The 
affidavits must be maintained in the corporation or partnership files subject to review by the 
Department of Revenue.

A Power of Attorney authorizing the corporation or partnership to file a nonresident income tax 

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return on behalf of the nonresident member must be executed by each qualifying member for 
each year the member wishes to be included in the composite return. The Powers of Attorney 
must be maintained in the corporation or partnership files subject to review by the Department 
of Revenue.

The following limitations and conditions shall apply to those members included in the 
composite return:

1. Only the standard deduction in lieu of itemized deductions will be allowed.

2. No tax credits will be allowed.

3. No net operating losses will be allowed.

4. A composite return filed by an entity may be on behalf of some or all of its 
members which are eligible to participate. However, a composite return cannot be 
filed with fewer than ten participating members. 

5. Any refund of overpayment of income taxes made on a composite basis must 
be remitted to the organization for distribution to the members.

6. No person who is required to make payments of Arizona estimated tax may be 
a member of the composite return. An individual who participates in the filing of a 
composite return cannot make voluntary Arizona estimated income tax payments. 
The entity filing the composite return may make voluntary estimated payments on 
a composite basis on behalf of the participating members. Such estimated income 
tax payments must be remitted with Arizona Form 140ES, under the filing entity's 
federal identification number.

7. A composite return may not be changed or corrected except by an amended 
composite return filed by the entity.

The filing of the form itself shall consist of the following:

1. The form for filing purposes will be the Arizona individual income tax return 
Form 140NR.

2. The top of the front page of the Form 140NR must be labeled "COMPOSITE 
RETURN."

3. The taxpayer's name and address shown on the front of Form 140NR will be 
the entity's name and address.

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4. The taxpayer's identifying number shown on the front of Form 140NR will be 
the entity's identifying number.

In the case of two or more affiliated partnerships reporting income from the 
members on one composite return, the taxpayer's name, address and identifying 
number shown on the front of Form 140NR will be the primary partnership's name 
address and identifying number. The name, address and identifying number of 
the remaining affiliated partnerships must be reported on an attached schedule.

5. A comprehensive schedule must be attached showing the names, addresses, 
social security numbers and mathematical calculations for the Arizona 
percentage, the standard deduction and the Arizona tax liability for each 
nonresident partner or shareholder included in the composite return. In the case 
of two or more affiliated partnerships reporting income from the members on one 
composite return, a schedule must be attached showing the separately computed 
income from each partnership for each partner and the computation of the 
member's tax liability which shall be computed on the total of the member's 
income from those partnerships less allowable subtractions and exemptions. 

6. The names, addresses and social security numbers of any excluded members 
must be disclosed on the composite return.

7. The composite return must be signed by the partners or corporate officers 
authorized to sign the partnership return or S corporation income tax return.

Each member's deductions, exemptions, and liability shall be computed separately in the 
following manner:

1. The Arizona percentage of each member's total income in relation to the 
federal income must first be computed. This is done by dividing the amount 
shown on the member's Arizona nonresident Schedule K-1 by the federal 
adjusted gross income shown on the member's individual federal income tax 
return.

2. The number of dependents, age sixty-five or over, blind and personal 
exemptions being claimed are to be multiplied by the amount allowable for the 
year being filed. This amount is then to be multiplied by the Arizona percentage.

3. The standard deduction for each member shall not exceed the maximum 
amount allowable for that member for the specific tax year being filed.

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4. The taxable income for each participating member shall be computed by 
beginning with the Arizona income shown on the member's nonresident Schedule 
K-1. From this amount, the amounts computed in items 2 and 3 above shall be 
deducted. The taxable income for each participating member reporting income 
from two or more affiliated partnerships shall be computed by beginning with the 
total of the Arizona income shown on the member's nonresident Schedule K-1s 
from each partnership.

5. Each member's tax liability shall be computed separately based on the 
separate taxable income using the appropriate tax table for the tax year involved.

6. The aggregate amounts for income, exemptions, deductions, and liabilities for 
all of the participating members are to be carried forward to the front of the return.

However, members who are participating in the filing of a composite return may elect to waive 
their right to claim all allowable exemptions, subtractions and deductions. If this is done, the 
tax is to be calculated directly upon the member's pro rata share of the entity income at the 
appropriate individual tax rate for the year. A participating member making this election must 
sign a waiver relinquishing the right to claim all of the exemptions, subtractions, and 
deductions allowed on the composite return. The waivers must be maintained in the corporate 
or partnership files subject to review by the Department of Revenue.

The state income tax liabilities of the participants included in the composite return may not be 
borne by the corporation or partnership, but must be paid by the member by direct remittance 
to the state, remittance to the corporation or partnership or by a charge against a shareholder's 
or partner's loan account.

Composite returns are due on the 15th day of the fourth month following the close of the 
taxable year of the shareholders or partners included in the composite return. Extension of 
time to file will be granted on a composite basis only and must be requested from the state 
(exclusive of whether or not a federal extension has been obtained). Arizona Form 204 must 
be used when requesting an extension. The extension request must be filed under the entity's 
federal identification number and payment of 90 percent of the composite tax liability must 
accompany the extension request.

Individual members are liable for any proposed assessment resulting from an audit, even 
though a composite return has been filed.

Mark Killian, Director 
July 22, 1997

Explanatory Notice 

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The purpose of a tax ruling is to provide interpretive guidance to the general public and to 
department personnel. A tax ruling is intended to encompass issues of law that are not 
adequately covered in statute, case law or administrative rules. A tax ruling is a position 
statement that provides interpretation, detail, or supplementary information concerning 
application of the law. Relevant statute, case law, or administrative rules, as well as a 
subsequent ruling, may modify or negate any or all of the provisions of any tax ruling. See 
GTP 96-1 for more detailed information regarding documents issued by the Department of 
Revenue.

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