FORMER TITLE 43
ARIZONA REVISED STATUTES
TAXATION OF INCOME

CHAPTER I

IN GENERAL

ARTICLE 1. IN GENERAL

Section

43-101. General provisions and definitions.

43-102. Imposition of tax.

43-102.01. Preemption by state of income taxation.

43-102.02. Powers of department of revenue.

43-111. Net income, definition.

43-112. Gross income.

43-112.01. Exclusion from gross income for payments to military survivors plans.

43-112.02. Gross income; gain from sale or exchange of residence of individual who has attained age sixty-five.

43-113. Gross income-forgiveness of indebtedness.

43-114. Gross income-gross income of nonresidents.

43-115. Income taxes of members of armed forces upon death.

43-123. Repealed by Laws 1973, Ch. 7, ' 2, eff. March 6, 1973.

43-123.01. Deductibility of dividends received from Arizona business and financing institutions.

43-123.02. Election to amortize expenditures incurred in the acquisition of atmospheric and water pollution control devices, machinery or equipment.

43-123.03. Deductions for expenses.

43-123.04. Deductions for interest.

43-123.05. Deductions for taxes.

43-123.06. Deductions for sales and other taxes separately stated.

43-123.07. Deductions for losses by individuals.

43-123.08. Deductions for losses by corporations.

43-123.09. Deductions for capital assets, losses.

43-123.10. Deductions for wagering losses.

43-123.11. Deductions for sixty day sales.

43-123,12. Deductions for wash sales.

43-123.13. Deductions for bad debts.

43-123.14. Deductions for depreciation.

43-123.15. Deductions for depletion.

43-123.16. Basis for depreciation and depletion.

43-123.17. Deductions for charitable and other contributions.

43-123.18. Deductions for contributions of an employer to an employee's trust or annuity plan and compensation under a deferred payment plan.

43-123.19. Deductions for charitable and other contributions by corporations.

43-123.20. Savings banks, cooperative banks and building and loan associations -- return paid or credited to withdrawable deposits.

43-123.21. Net operating loss deduction.

43-123.22. Deductions for adoption expenses.

43-123.23. Deductions for alimony.

43-123.24. Bond premium deduction.

43-123.25. Deductions in respect of decedent.

43-123.26. Deductions; medical expenses.

43-123.27. Deductions for care of qualified dependents.

43-123.28. Deductions for amounts representing taxes and interest paid to cooperative apartment corporation.

43-123.29. Optional standard deduction for individuals.

43-123.30. Deductions for development expenses; oil, gas and geothermal resources.

43-123.31. Deductions for development expenses, mines.

43-123.32. Deductions for dividends from Arizona corporations.

43-123.33. Deductions for exploration expenses.

43-123.34. Deductions for farmers' cooperatives and other cooperatives.

43-123.35. Additional first-year depletion allowance.

43-123.36. Unincorporated trusts or associations qualifying as "real estate investment trusts" for federal income tax purposes; income distribution deduction.

43-123.37. Election to amortize expenditures incurred in the acquisition of any solar energy device.

43-123.38. Deduction for child care facilities for employees' children; deduction for facilities of proprietary for profit child care organizations.

43-123.39. Moving expense deduction.

43-123.40. Deduction for retirement savings.

43-123.41. Deduction for retirement savings for certain married individuals.

43-123.42. Qualified pension, profit-sharing, and stock bonus plans.

43-123.43. Taxability of beneficiary of employee's trust.

43-123.44. Taxation of employee annuities.

43-123.45. Deduction for contributions of an employer to an employees' trust or annuity plan and compensation under a deferred-payment plan.

43-123.46. Qualified bond purchase plans.

43-123.47. Deduction for expenses paid for mental retardation residential services.

43-124. Mitigation of effect of renegotiation of war contracts or disallowance of reimbursement.

43-125. Deductions from gross income -- deductions of nonresidents.

43-126. Deductions from gross income -- items not deductible.

43-127. Credits allowed taxpayers -- credits against net income.

43-127.01. Apportionment of deductions and personal exemptions.

43-128. Credit allowed taxpayers -- credit for taxes paid.

43-128.01. Earned credit allowed taxpayers -- credit for property taxes paid.

43-128.02. Credit allowed taxpayers -- credit for rent paid.

43-128.02. Credit allowed taxpayers -- credit for rent paid.

43-128.03. Credit allowed taxpayers for solar energy devices.

43-128.04. Credit allowed taxpayers for installation of residential insulation and devices.

43-129. Alternative optional tax in case of resident individuals and resident married couples.

43-130. Amounts modified to reflect state consumer price index.

43-131. Accounting periods and methods of accounting.

43-132. Accounting factors.

43-133. Deduction and credit, when taken.

43-134. Installment basis.

43-135. Allocation of income deductions.

43-136. Compensation for services rendered for a period of thirty-six months or more and back pay.

43-137. Returns for a period of less than twelve months.

43-141. Returns.

43-142. Returns -- time and place for filing returns.

43-143. Returns executed by tax commission.

43-144. Returns of exempt organizations.

43-145. Publicity of returns; classification.

43-145.01. Confidentiality of information; exception; disclosure; classification.

43-145.02. Solicitation of preparation of returns or reports prohibited; classification.

43-146. Payment of tax.

43-147. Exemptions from tax on corporations.

43-148. Requirements for exemption of certain organizations under ' 43-147(a)(4) and for deductibility of contributions made to such organizations.

43-149. Taxation of business income of certain section 43-147 organizations.

43-151. Gain or loss-determination of gain or loss.

43-152. Gain or loss-recognition of gain or loss.

43-153. Basis for determining gain or loss, unadjusted basis.

43-154. Gain or loss-basis for depreciation and depletion.

43-155. Gross income-dividends and other distributions.

43-157. Capital gains or losses.

43-158. Gross income and deductions in respect of decedents.

43-159. Deductions from gross income-war losses.

43-160. Employee stock options.

43-161. Imposition of tax upon estates and trusts.

43-162. Net income of estates and trusts.

43-163. Taxation of estates and trust-armed services deduction and refunds.

43-164. Taxation of estates and trusts-income in case of divorce.

43-165. Taxation of estates and trusts-employees' trusts.

43-166. Taxation of estates and trusts-trusts taxable to grantor.

43-167. Taxation of estates and trusts-income for benefit of grantor.

43-168. Taxation of estates and trusts-liability of fiduciary.

43-169. Common trust funds.

43-171. Taxation of partnerships.

43-175. Administration of tax-powers and duties of department of revenue.

43-175.01. Renumbered as ' 43-179.01.

43-176. Power of examination.

43-177. Payments and assessments-deficiency assessments.

43-178. Payments and assessments including jeopardy assessments.

43-179. Violations; civil penalty; classification.

43-179-01. Enforcement.

43-180. Payments and assessments-penalties.

43-181. Interest and penalty for failure to remit.

43-183. Transferee liability.

43-184. Overpayments and refunds -- claim for refund.

43-185. Overpayments and refunds -- cancellations.

43-186. Overpayments and refunds -- actions against the department.

43-188. Collection of tax-information at source; withholding tax.

43-189. Nonresident wages; applications to commission.

43-191. Lien of tax -- judgment for tax-priority of tax claim.

43-192. Seizure and sale.

43-193. Collection of tax-suit for tax.

43-195. Collection of tax.

43-196. Disposition of proceeds.

43-196.01. Establishment and distribution of urban revenue sharing fund.

43-197. Cessation of activities; classification.

43-199. General provisions.

ARTICLE 1. IN GENERAL

' 43-101. General provisions and definitions

(a) Effective date. The provisions of this title shall apply only to taxable years beginning after December 31, 1953.

(b) Construction. Except where the context otherwise requires, the definitions given in this section govern the construction of this title.

(c) Tax commission. "Tax commission" or "commission" means the department of revenue.

(d) Tax. "Tax" means the taxes imposed under this title.

(e) Taxpayer. "Taxpayer" means any person subject to a tax imposed by this title, but in no case shall it include the United States, the state, counties, cities, villages, school districts, or other political subdivisions or units of the state or federal government.

(f) Individual. "Individual" means a natural person.

(g) Fiduciary. "Fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, whether individual or corporate, or any person acting in any fiduciary capacity for any person, estate or trust.

(h) Person. "Person" includes individuals, fiduciaries, partnerships, and corporations.

(i) Partnership. "Partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on and which is not, within the meaning of this title, a trust or estate or a corporation.

"Partner" includes a member in such a syndicate, group, pool, joint venture, or organization.

(j) Corporation. "Corporation" shall mean and include all corporations, joint stock companies, banks, insurance companies, business trusts or so-called "Massachusetts trusts", investment companies, building and loan associations, and other associations whether incorporated or unincorporated.

(k) Taxable year. "Taxable year" means the calendar year or the fiscal year (ending during such calendar year) upon the basis of which the net income is computed under this title. If no fiscal year has been established, "taxable year" means the calendar year.

"Taxable year" means, in the case of a return made for a fractional part of a year under this title or under regulations prescribed by the tax commission, the period for which the return is made.

(l) Income year. For the purposes of the tax imposed under this title, wherever "income year" is used throughout this title it means "taxable year" as that term is defined in this section.

(m) Fiscal year. "Fiscal year" means an accounting period of twelve months ending on the last day of any month other than December.

(n) Paid or incurred. "Paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under this title.

(o) Assessment. "Assessment" includes "proposed additional assessment".

(p) Resident. "Resident" includes:

(1) Every individual who is in this state for other than a temporary or transitory purpose.

(2) Every individual domiciled in this state who is outside the state for a temporary or transitory purpose.

Any individual who is a resident of this state continues to be a resident even though temporarily absent from the state.

(q) Nonresident. "Nonresident" means every individual other than a resident.

(r) Presumption of residence. Every individual who spends in the aggregate more than nine months of the taxable year within this state shall be presumed to be a resident, The presumption may be overcome by competent evidence that the individual is in the state for a temporary or transitory purpose.

(s) United States. "United States", when used in a geographical sense, includes the states, the District of Columbia, and the possessions of the United States.

(t) State. "State" includes the states of the United States, the District of Columbia, and the possessions of the United States.

(u) Foreign country. "Foreign country" means any jurisdiction other than one embraced within the United States.

(v) Trade or business. "Trade or business" includes the performance of the functions of a public office.

(w) Husband and wife.

(1) As used in ' 43-112(c)(1), (2) and (4), ' 43-123.23 and ' 43-164, and the last paragraph of ' 43-127(c), if the husband and wife therein referred to are divorced, the term "wife" shall be read "former wife" and the term "husband" shall be read "Former husband". If the payments described in such sections are made by or on behalf of the wife or former wife to the husband or former husband instead of vice versa, wherever appropriate to the meaning of such sections, the term "husband" shall be read "wife" and the term "wife" shall be read "husband".

(2) An individual who is legally separated from his (or her) spouse under a decree of divorce or of separate maintenance shall not be considered as married (or as husband and wife).

(3) A taxpayer shall be considered as married at the close of his (or her) taxable year if his (or her) spouse died during the taxable year.

(x) Head of household. For the purposes of this title, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year and maintains as his home a household which constitutes for such taxable year the principal place of abode, as a member of such household, of any person who is a dependent of the taxpayer, if the taxpayer is entitled to an exemption for the taxable year for such person under ' 43-127(c). An individual may be considered as maintaining a household only if over half of the cost of maintaining the household during the taxable year is furnished by such individual.

(y) Military or naval forces. The term "military or naval forces of the United States" includes the army, the navy, the air force, the marine corps, the coast guard, the army nurse corps, female, the women's army auxiliary corps, the navy nurse corps, female, and the women's reserve branch of the naval reserve.

(z) Counsel for tax commission. The terms "counsel for tax commission" and "tax commission counsel" as used in this title, means attorney or attorneys acting subject to the approval and under the supervision of the department of law, and the attorney general.

(aa) Income derived from sources within this state. Income derived from or attributable to sources within this state includes income from tangible or intangible property located or having a situs in this state and income from any activities carried on in this state, regardless of whether carried on in intrastate, interstate or foreign commerce.

(bb) Specific definitions. Definitions, other than general definitions, are set forth in the section to which specifically applicable.

(cc) "Board" means the state board of tax appeals or when applicable a division thereof.

(dd) "Department" means the department of revenue.

(ee) "Director" means the director of the department of revenue.

' 43-102. Imposition of tax

(a) Taxes and rates -- individuals, estates and trusts. There shall be levied, collected, and paid for each taxable year upon the entire net income of every estate or trust taxable under this title and of every resident of this state and upon the entire net income of every nonresident which is derived from sources within this state, taxes in the following amounts and at the following rates upon the amount of net income in excess of credits against net income provided in '' 43-127 and 43-128.

On the first one thousand dollars or any part thereof, two per cent.

On the second one thousand dollars or any part thereof, three per cent.

On the third one thousand dollars or any part thereof, four per cent.

On the fourth one thousand dollars or any part thereof, five per cent.

On the fifth one thousand dollars or any part thereof, six per cent.

On the sixth one thousand dollars or any part thereof, seven per cent.

On the seventh one thousand dollars or any part thereof, and all taxable income in excess of seven thousand dollars, eight per cent.

(b) Taxes and rates -- corporations. There shall be levied, collected, and paid for each taxable year upon the entire net income of every corporation, except as otherwise provided in this title or by law, taxes in the following amounts and at the following rates:

Upon net income not in excess of one thousand dollars, two and one-half per cent of such net income.

Twenty-five dollars upon net income of one thousand dollars; and upon net income in excess of one thousand dollars and not in excess of two thousand dollars, four per cent in addition of such excess.

Sixty-five dollars upon net income of two thousand dollars; and upon net income in excess of two thousand dollars and not in excess of three thousand dollars, five per cent in addition of such excess.

One hundred fifteen dollars upon net income of three thousand dollars; and upon net income in excess of three thousand dollars, and not in excess of four thousand dollars, six and one-half per cent in addition of such excess.

One hundred eighty dollars upon net income of four thousand dollars; and upon net income in excess of four thousand dollars and not in excess of five thousand dollars, eight per cent in addition of such excess.

Two hundred sixty dollars upon net income of five thousand dollars; and upon net income in excess of five thousand dollars and not in excess of six thousand dollars, nine per cent in addition of such excess.

Three hundred fifty dollars upon net income of six thousand dollars; and upon net income in excess of six thousand dollars, ten and one-half per cent in addition of such excess.

(c) Optional tax.

In applying the above table to determine the tax of such individual, there shall be subtracted from his gross income the amount of the federal income tax paid during the taxable year.

In applying the above table to determine the tax of a taxpayer with one or more dependents, there shall be subtracted from his gross income six hundred dollars for each dependent, except that in the case of a "head of household" the deduction for dependents shall be permitted only for those dependents in excess of one.

(2) For the purpose of this subsection:

(A) "Married person" means a married person on the last day of the taxable year.

(B) "Dependent" means a person who is dependent under ' 43-127(c).

(C) An individual, who is not a head of a family or a married person, shall be treated as a single person.

(D) "Head of household" means a head of household on the last day of the taxable year, unless such person dies during the taxable year, in which case such determination shall be made as of the date of death.

(E) In the case of a joint return of a husband and wife filed pursuant to ' 43-141(a)(2), the tax imposed under subsection (a) shall be twice the tax that would be determined if the net income and credits against net income provided by '' 43-127 and 43-128 were reduced by one-half,

(3) This subsection shall not apply to an estate or trust, an individual filing a return for a period of less than twelve months on account of a' change in the accounting period, or to a married individual whose spouse files a return and computes the tax without regard to this section or ' 43-123.29, subsection A.

(d) Effect of changes in rates during a taxable year

If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then

(1) Tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and

(2) The tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.

(e) In the preparation of any return under this title, the taxpayer may elect to eliminate the fractional dollar by rounding out the fractional dollar to the nearest whole dollar.

' 43-102.01. Preemption by state of income taxation

The area of income taxation is preempted by the state, and a county, city, town or other political subdivision of this state shall not levy an income tax, so long as the urban revenue sharing fund is maintained as provided in ' 43-196.01.

' 43-102.02. Powers of department of revenue

The department of revenue shall be authorized to alter the optional tax table contained in ' 43-102, subsection (c) to reflect the changes mandated by ' 43-130.

' 43-111. Net income, definition

"Net income" means the gross income computed under this title less the deductions allowed by this title.

' 43-112. Gross income

(a) Definition -- "Gross income". Gross income includes any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment, gains, profits, and income derived from salaries, wages, or compensation for personal service, including personal service as an officer or employee of this state or the federal government, or any political division thereof or any agency or instrumentality of any one or more of the foregoing, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever, including interest which now or hereafter constitutionally may be taxed.

(b) Exclusions from gross income. In computing the tax imposed under this title, gross income" does not include any of the items specified in this subsection.

(1) Life insurance -- death benefits. Gross income does not include amounts received:

(A) Under a life insurance contract, paid by reason of the death of the insured or,

(B) Under a contract of an employer providing for the payment of such amounts to the beneficiaries of an employee, paid by reason of the death of the employee; whether in a single sum or otherwise (but if such amounts are held by the insurer, or the employer, under an agreement to pay interest thereon, the interest payments shall be included in gross income). The aggregate of the amounts excludible under (B) by all the beneficiaries of the employee under all such contracts of any one employer may not exceed five thousand dollars.

(2) Life insurance other than death benefits. Gross income also does not include amounts received (other than amounts paid by reason of the death of the insured and interest payments on such amounts and other than amounts received as annuities) under a life insurance or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contract) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income.

(3) Annuity. Gross income also does not include amounts received as an annuity under an annuity or endowment contract, but if such amounts (when added to amounts received before the taxable year under such contracts) exceed the aggregate premiums or consideration paid (whether or not paid during the taxable year) then the excess shall be included in gross income.

(4) Other insurance proceeds. Gross income does not include amounts received (other than amounts paid by reason of the death of the insured under life insurance, endowment or annuity contracts) either during the term or at maturity or upon surrender of the contract, equal to the total amount of premiums paid thereon. In the case of a transfer for a valuable consideration by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be excluded from gross income under paragraph (1). The preceding sentence shall not apply in the case of such a transfer if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor.

(5) Alimony paid under life insurance, endowment, or annuity contract. Paragraphs (1), (2), (3) and (4) shall not apply with respect to so much of a payment under a life insurance, endowment, or annuity contract, or any interest therein, as is includible in gross income under subsection (e), (1), (2), (3) and (4).

(6) Annuities for employees. If an annuity contract is purchased by an employer for an employee under a plan with respect to which the employer's contribution is deductible under section 43-123.18 or if an annuity contract is purchased for an employee by an employer exempt under section 43-147(a) (4) the employee shall include in his income the amounts received under such contract for the year received. If the employee paid any of the consideration for the annuity, the annuity shall be included in his income as provided in paragraphs (2), (3) and (4). The consideration for the annuity is the amount contributed by the employee.

(7) Employee annuities, nonforfeitable. Except as provided in paragraph (6), if the employee's rights under the contract are nonforfeitable other than for failure to pay future premiums, the amount contributed by the employer for such annuity contract on or after such rights become nonforfeitable shall be included in the income of the employee in the year in which the amount is contributed. This amount, together with any amount contributed by the employee, shall constitute the consideration paid for the annuity contract in determining the amount of the annuity required to be included in the income of the employee under paragraphs (2), (3), and (4).

(8) Joint and survivor's annuity. For purposes of paragraphs (2), (3), (4), (6) and (7), where amounts are received by a surviving annuitant under a joint and survivor's annuity contract and the basis of such survivor annuitant's interest is determined under section 43-153(a)(5)(A) the consideration paid for such survivor's annuity shall be considered to be an amount equal to such basis.

(9) Gifts. Gross income also does not include the value of property acquired by gift, bequest, devise, or inheritance. There shall not be excluded from gross income under this paragraph the income from such property, or, in case the gift, bequest, devise, or inheritance is of income from property, the amount of income. For the purposes of this paragraph, if, under the terms of the gift, bequest, devise, or inheritance, payment, crediting, or distribution thereof is to be made at intervals, to the extent that it is paid or credited or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property.

(10) Tax exempt interest. Gross income also does not include interest upon the obligations of this state or any political subdivision thereof, or the obligations of the United States or its possessions.

(11) Amounts received for injury or sickness. Except in the case of amounts attributable to, and not in excess of, deductions allowed under ' 43-123.26, subsections A, B and C, gross income also does not include amounts received through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness. Gross income does not include amounts received as a pension, annuity, medical retirement or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country.

(12) Minister's compensation. Gross income also does not include the rental value of a dwelling house and appurtenances thereof furnished to a minister of a religion as part of his compensation.

(13) Compensation of employees of foreign government. Gross income also does not include wages, fees, or salary of an employee of a foreign country (including a consular or other officer, or non-diplomatic representative) received as compensation for official services to that country:

(A) If the employee is not a citizen of the United States;

(B) If the services are of a character similar to those performed by employees of the United States in foreign countries; and

(C) If the foreign country and political subdivision thereof do not tax the wages, fees, or salaries of employees of the United States performing similar services in that country.

(14) Discharge of indebtedness evidenced by security. Gross income does not include the amount of any income of a corporation attributable to the discharge, within the income year, of any indebtedness of the taxpayer, or for which the taxpayer is liable, evidenced by a security, as hereinafter defined, if the taxpayer makes and files at the time of filing the return, in such manner as the department by regulation prescribes, its consent to the regulations prescribed under ' 43-153(b)(3). In such case the amount of any income of the taxpayer attributable to any unamortized premium, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be allowed as a deduction. "Security" means any bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation.

(15) Discharge of indebtedness -- railroad corporation -- Sec. 77m, Bankruptcy Act. Gross income does not include the amount of any income attributable to the discharge, within the income year, of any indebtedness of a railroad corporation, as defined in section 77m of the national bankruptcy act, as amended, to the extent that such income is deemed to have been realized by reason of a modification in or cancellation in whole or in part of such indebtedness pursuant to an order of a court in a receivership proceeding or in a proceeding under section 77 of the national bankruptcy act, as amended. In such case the amount of any income of the taxpayer attributable to any unamortized premium, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be included in gross income and the amount of the deduction attributable to any unamortized discount, computed as of the first day of the income year in which such discharge occurred, with respect to such indebtedness shall not be allowed as a deduction. Paragraph (14) shall not apply with respect to any discharge of indebtedness to which this paragraph applies.

(16) Lessee improvements. Gross income also does not include income, other than rent, derived by a lessor of real property upon the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.

(17) Recovery of bad debt, prior tax, or delinquency amount. Gross income also does not include income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to that debt, tax, or amount.

(18) Bad debt. As used in paragraph (17) "bad debt" means a debt on account of worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.

(19) Prior tax. As used in paragraph (17) "prior tax" means a tax on account of which a deduction or credit was allowed for a prior taxable year.

(20) Delinquency amount. As used in paragraph (17) "delinquency amount" means an amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to failure to file a return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file a return with respect to a tax or pay a tax.

(21) Recovery exclusion. As used in paragraph (17) "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the department, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this title, reduced by the amount excludible in previous taxable years with respect to such debt, tax or amount under this paragraph.

(22) Compensation for military service.

(A) Gross income also does not include the salary, wages, bonuses, allowances, and other compensation received by an individual for his services as a member of the armed forces of the United States, including any auxiliary branch thereof, up to and including one thousand dollars per annum in the aggregate.

(B) Gross income also does not include amounts received during the taxable year as mustering out payments and terminal leave and unused leave pay and bonds, and educational benefits received under federal or state legislation with respect to services in the military or naval forces of the United States.

(23) Option price -- employee stock options. Gross income also does not include any amount, other than the option price, received by any bank or corporation, or its parent or subsidiary bank or corporation, as consideration for the issuance of stock to an employee of such bank or corporation, as a result of the exercise by the employee of a "restricted stock option" as defined in section 43-160(d)(1).

(24) Constitutionally exempt income. Gross income also does not include income which this state is prohibited from taxing under the constitution or laws of the United States of America or under the constitution of this state.

(25) Federal civil service benefits. The amount of two thousand five hundred dollars or less received each year as annuities under the United States civil service retirement system from the United States government service retirement and disability fund.

(26) Dividends from controlled corporations. Gross income also does not include, in the case of a corporation, dividends received from another corporation owned or controlled directly or indirectly by the recipient-corporation. "Control" for purposes of this subsection shall mean direct or indirect ownership or control of fifty per cent or more of the voting stock of the payor-corporation by the recipient-corporation. Dividends shall have the meaning provided in section 43-155(a). This exclusion shall apply without regard to the provisions of section 43-123.04, section 43-135(g), and section 43-126(a)(5) with the exception of the deduction for federal income taxes.

(27) Tax rebates. Gross income also does not include income gained from special individual income tax rebates given by the federal government in excess of any individual income tax refunds given pursuant to sections 6401 and 6402 of the United States Internal Revenue Code. Tax rebates do not include refunds given as the result of the refiling of a federal individual income tax return or as the result of an audit performed by the internal revenue service.

(c) Inventories, as prescribed by the department. Whenever in the opinion of the department the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by the taxpayer upon such basis as the department may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

(d) Method used in inventorying goods.

(1) First in, last out method, permissible. A taxpayer may use the following method (whether or not the method has been prescribed under subsection (c) ) in inventorying goods specified in the application required under paragraph (2):

(A) Inventory them at cost;

(B) Treat those remaining on hand at the close of the taxable year as being: first, those included in the opening inventory of the taxable year (in order of acquisition) to the extent thereof, and second, those acquired in the taxable year; and

(C) Treat those included in the opening inventory of the taxable year in which the method is first used as having been acquired at the same time and determine their cost by the average cost method.

(2) First in, last out method, when applicable. The method described in paragraph (1) may be used

(A) Only in inventorying goods (required under subsection (c) to be inventoried) specified in an application to use such method filed at such time and in such manner as the department may prescribe; and

(B) Only if the taxpayer establishes to the satisfaction of the department that the taxpayer has used no procedure other than that specified in subparagraphs (B) and (C) of paragraph (1) in inventorying to ascertain the income, profit, or loss of the first taxable year for which the method described in paragraph (1) is to be used, for the purpose of a report or statement covering the taxable year to shareholders, partners, or other proprietors, or to beneficiaries, or for credit purposes.

(3) First in, last out method, department to prescribe regulations. The change to, and the use of, the described method shall be in accordance with such regulations as the department may prescribe as necessary in order that the use of the method may clearly reflect income.

(4) First in, last out method, inventoried at cost. In determining income for the taxable year preceding the taxable year for which the described method is first used, the closing inventory of such preceding year of the goods specified in the application shall be at cost.

(5) First in, last out method, inconsistent use. If a taxpayer, having complied with paragraph (2), uses the method described in paragraph (1) for any taxable year, that method shall be used in all subsequent taxable years unless

(A) With the approval of the department a change to a different method is authorized; or

(B) The department determines that the taxpayer has used for any such subsequent taxable year some procedure other than that specified in subparagraph (B) of paragraph (1) in inventorying the goods specified in the application to ascertain the income, profit or loss of such subsequent taxable year for the purpose of a report or statement covering such taxable year to shareholders, partners, or other proprietors, or beneficiaries, or for credit purposes, and requires a change to a method different from that prescribed in paragraph (1) beginning with such subsequent taxable year or any taxable year thereafter.

In either of the above cases, the change to, and the use of the different method shall be in accordance with such regulations as the department may prescribe as necessary in order that the use of such method may clearly reflect income.

(6) Adjustment of net income, when applicable. The net income of the taxpayer otherwise determined for the year of involuntary liquidation shall be adjusted according to the provisions of paragraphs (7) an (8):

(A) If, for any taxable year beginning after December 31, 1953, and while a state of war exists and prior to the termination of such war as proclaimed by the president of the United States, the closing inventory of a taxpayer inventorying goods under the method provided in this subsection reflects a decrease from the opening inventory of goods for this year; and

(B) If, at the time of the filing of the taxpayer's income tax return for such year, the taxpayer elects to have the provisions of paragraphs (6) through (15) apply and so notifies the department; and

(C) If, at the time of such election, it is established to the satisfaction of the department, in accordance with the rules and regulations prescribed by the department, that such decrease is attributable to the involuntary liquidation of the inventory as defined in paragraph (9); and

(D) If the closing inventory of a subsequent taxable year, ending not more than four years after the termination of such war as proclaimed by the president of the United States, reflects a replacement, in whole or in part, of the goods so previously liquidated.

(7) Adjustment of net income, method. The taxpayer's net income shall be adjusted as follows:

(A) Increased by an amount equal to the excess, if any, of the aggregate cost of such goods reflected in the opening inventory of the year of involuntary liquidation over the aggregate replacement cost; or

(B) Decreased by an amount equal to the excess, if any, of the aggregate replacement cost of such goods over the aggregate cost thereof reflected in the opening inventory of the year of the involuntary liquidation.

(8) Adjustment of taxes. The taxes imposed by this title for the year of such liquidation and for all taxable years intervening between that year and the year of replacement shall be redetermined giving effect to adjustments provided for in paragraph (6). Any increase in taxes resulting from these adjustments shall be assessed and collected as a deficiency but without interest, and any overpayment so resulting shall be credited or refunded to the taxpayer without interest.

(9) Definition -- "involuntary liquidation". As used in paragraphs (6) through (15), "involuntary liquidation" means the sale or other disposition of goods inventoried under the method described in this subsection, either voluntary or involuntary, coupled with a failure on the part of the taxpayer to purchase, manufacture, or otherwise produce and have on hand at the close of the taxable year in which a sale or other disposition occurred such goods as would, if on hand at the close of such taxable year, be subject to the provisions of this subsection if such failure on the part of the taxpayer is due, directly and exclusively:

(A) To enemy capture or control of sources of limited foreign supply;

(B) To shipping or other transportation shortages;

(C) To material shortages resulting from priorities or allocations;

(D) To labor shortages;

(E) To other prevailing war conditions, beyond the control of the taxpayer.

(10) Replacements. If, in the case of any taxpayer subject to the provisions of paragraphs (6), (7) and (8), the closing inventory of the taxpayer for a taxable year, subsequent to the year of involuntary liquidation but prior to the complete replacement of the goods so liquidated, reflects an increase over the opening inventory of the goods for the taxable year, the goods reflecting such increase shall be considered, in the order of their acquisition, as having been acquired in replacement of the goods most recently liquidated (whether or not in a year of involuntary liquidation) and not previously replaced. If the liquidation was an involuntary liquidation, the goods reflecting the increase shall be taken into purchases and included in the closing inventory of the taxpayer for the year of replacement at the inventory cost basis of the goods replaced.

(11) Election, irrevocable. An election by the taxpayer to have the provisions of paragraphs (6) through (15) apply, once made, shall be irrevocable and shall be binding for the year of the involuntary liquidation and for all determinations for prior and subsequent taxable years insofar as they are related to the year of liquidation or replacement.

(12) Adjustment, within three years. If the adjustments specified in paragraphs (6), (7) and (8) are, with respect to any taxable year, prevented, on the date of the filing of the income tax return of the taxpayer for the year of the replacement, or within four years from such date, by any provision or rule of law (other than paragraphs (12) through (15) such adjustments shall nevertheless be made if, in respect to the taxable year for which the adjustment is sought, a notice of proposed additional assessment is mailed or a claim for refund is filed, as the case may be, within four years after the date of the filing of the income tax return for the year of replacement.

(13) Adjustment, limited to effect of liquidation. If, at the time of the mailing of the notice of proposed additional assessment or the filing of the claim for refund, the adjustment is so prevented, then the amount of the adjustment authorized by paragraphs (6) through (15) shall be limited to the increase or decrease of the tax imposed by this title previously determined for the taxable year which results solely from the effect of paragraphs (6), (7) and (8). The tax previously determined shall be ascertained in accordance with rules and regulations prescribed by the department.

(14) Adjustment, method of assessment or refund. The amount of the adjustment shall be assessed and collected, or credited or refunded in the same manner as if it were a deficiency or an overpayment, as the case may be, for such taxable year and as if, of, the date of the filing of the income tax return for the year of the replacement, three years remain before the expiration of the periods of limitation upon assessment or the filing Of claim for refund for the taxable year.

(15) Adjustment, based on paragraph (6). The amount of the adjustment shall not be diminished by any credit or set-off based upon any item, inclusion, deduction, credit exemption, gain, or loss, other than one resulting from the effect of paragraphs (6), (7): and (8). The amount, if paid, shall not be recovered by a claim or suit for refund or suit for erroneous refund based upon any item, inclusion, deduction, credit, exemption, gain, or loss, other than one resulting from the effect of paragraphs (6), (7) and (8).

(e) Alimony, etc.

(1) Alimony-periodic payments. In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife. Such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband.

(2) Minor's support. Paragraph (1) shall not apply to that part of any periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of the husband. In case any periodic payment is less than the amount specified in the decree or written instrument, that payment, to the extent of the sum payable for support, shall be considered a payment for such support.

(3) Alimony installment payments of less than ten years. Installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree or instrument shall not be considered period ' payments for the purposes of paragraphs (1) and (2).

(4) Alimony installment payments of more than ten years. An installment payment shall be considered a periodic payment for the purposes of paragraphs (1) and (2) if the principal sum, by the terms of the decree or instrument may be or is to be paid within a period ending more than ten years from the date of such decree or instrument. But it shall be considered a periodic payment only to the extent that the installment payment for the taxable year of the wife (or if more than one installment payment for the taxable year is received during the taxable year, the aggregate of these installment payments) does not exceed ten per cent of the principal sum. For the purposes of paragraph (3) and this paragraph, the portion of a payment of the principal sum which is allocable to a period after the taxable year of the wife in which it is received shall be considered an installment payment for the taxable year in which it is received.

(f) Definition -- "adjusted gross income". As used in this title, the term "adjusted gross income" means the gross income minus --

(1) The deductions allowed by sections 43-123.03 through 43-123.35 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee;

(2) The deductions allowed by sections 43-123.03 through 43-123.35 which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee;

(3) The deductions allowed by sections 43-123.03 through 43-123.35 (other than expenses of travel, meals, and lodging while away from home) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer;

(4) The deductions (other than those provided in paragraphs (1), (5) or (6) ) allowed by sections 43-123.03 through 43-123.35, which are attributable to property held for the production of rents or royalties;

(5) The deductions (other than those provided in paragraph (1)) for depreciation and depletion, allowed by sections 43-123.14 and 43-123.15., to a life tenant of property or to an income beneficiary of property held in trust; and

(6) The deductions (other than those provided in paragraph (1)) allowed by sections 43-123.03 through 43-123.35 as losses from the sale or exchange of property.

(g) Dealers in tax exempt securities.

(1) "Short-term municipal bonds", income from. In computing the gross income of a taxpayer who holds during the taxable year a short-term municipal bond (as defined in paragraph (2)(A)) primarily for sale to customers in the ordinary course of his trade or business.

(A) if the gross income of the taxpayer from such trade or business is computed by the use of inventories and his inventories are valued on any basis other than cost, the cost of securities sold (as defined in paragraph (2)(B)) during such year shall be reduced by an amount equal to the amortizable bond premium that would be disallowed as a deduction for such year pursuant to section 43-123.24, subsection B, paragraph 2 if the definition in section 43-123.24, subsection F of the term "bond" did not exclude such short-term municipal bond; or

(B) If the gross income of the taxpayer from such trade or business is computed without the use of inventories, or by use of inventories valued at cost, and the short-term municipal bond is sold or otherwise disposed of during such year, the adjusted basis (computed without regard to this subparagraph) of the short-term municipal bond shall be reduced by the amount of the adjustment that would be required under section 43-153(b)(1)(D) if the definition in section 43-123.24 of the term "bond" did not include such short-term municipal bond.

(2) Definition -- "Short-term municipal bonds." For the purposes of paragraph (l) --

(A) The term "short-term municipal bond" means any obligation issued by a government or political subdivision thereof if the interest on such obligation is excludible from gross income; but such term does not include such an obligation if (i) it is sold or otherwise disposed of by the taxpayer within thirty days after the date of its acquisition by him, or (ii) its earliest maturity or call date is a date more than five years from the date on which it was acquired by the taxpayer.

(B) The term "cost of securities sold" means the amount ascertained by subtracting the inventory value of the closing inventory of a taxable year from the sum of (i) the inventory value of the opening inventory for such year and (ii) the cost of securities and other property purchased during such year which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.

' 43-112.01. Exclusion from gross income for payments to military survivors plans

In computing the tax imposed under this title, gross income does not include, in the case of a member of the uniformed services of the United States, the amount of reduction of such person's retired or retainer pay for participation in certain military survivors annuity plans pursuant to title 10, chapter 73 of the United States Code. When Arizona income taxes have already been paid on amounts not received by the military retiree due to participation in the United States survivor benefit plan or the United States retired serviceman's family protection plan, recoupment may be obtained as follows:

1. All amounts received after December 31, 1977 as retired or retainer pay shall be excluded from gross income until such member has excluded an amount equal to the total amount of such reductions subject to Arizona income tax before December 31, 1977 plus any amounts deposited at any time by such member pursuant to title 10, section 1438 or section 1452(d) of the United States Code. This paragraph shall apply only to the extent that the amounts received would otherwise be includable in gross income.

2. All amounts received by a beneficiary of an annuity under title 10, chapter 73 of the United States Code shall be excluded from gross income until such beneficiary has excluded an amount equal to any exclusion allowable under paragraph 1 which was not previously excluded by the member. Thereafter, all amounts received by a beneficiary shall be included in gross income.

' 43-112.02. Gross income; gain from sale or exchange of residence of individual who has attained age sixty-five

A. Subject to the limitations provided in subsection B of this section at the election of the taxpayer, gross income does not include gain from the sale or exchange of property if both of the following apply:

1. The taxpayer has attained the age of sixty-five before the date of such sale or exchange.

2. During the eight-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his or her principal residence for periods aggregating five years or more.

B. If the adjusted selling price of the property sold or exchanged exceeds thirty-five thousand dollars, the provisions of subsection A of this section shall apply to that portion of the gain which bears the same ratio to the total amount of such gain as thirty-five thousand dollars bears to such adjusted selling price. For purposes of this subsection, "adjusted selling price" has the meaning assigned to such term as used in ' 43-152, subsection (n).

C. The provisions of subsection A of this section shall not apply to any sale or exchange by the taxpayer if an election by the taxpayer or the taxpayer's spouse pursuant to subsection A of this section with respect to any other sale or exchange is in effect.

D. An election pursuant to subsection A of this section may be made or revoked at any time before the expiration of the period for making a claim for credit or refund of the tax imposed by this title for the taxable year in which the sale or exchange occurred and shall be made or revoked in such manner as the department shall by regulations prescribe. In the case of a taxpayer who is married, an election pursuant to subsection A of this section or a revocation may be made only if his or her spouse joins in such election or revocation.

E. Both husband and wife shall be treated as satisfying the age, holding and use requirements of subsection A of this section with respect to such property if all of the following apply:

1. Property is held jointly by a husband and wife as joint tenants, tenants by the entirety or community property.

2. Such husband and wife make a joint return pursuant to ' 43-141 for the taxable year of the sale or exchange.

3. One spouse satisfies the age, holding and use requirements of subsection A of this section with respect to such property.

F. An unmarried individual whose spouse is deceased on the date of the sale or exchange of property shall be treated as satisfying the holding and use requirements of subsection A, paragraph 2 of this section with respect to such property if:

1. The deceased spouse, during the eight-year period ending on the date of the sale or exchange, satisfied the holding and use requirements of subsection A, paragraph 2 of this section with respect to such property.

2. No election by the deceased spouse pursuant to subsection A of this section is in effect with respect to a prior sale or exchange.

G. If the taxpayer holds stock as a tenant-stockholder, as defined in ' 43-123.28, in a cooperative apartment corporation, as defined in ' 43-123.28:

1. The holding requirements of subsection A, paragraph 2 of this section shall be applied to the holding of such stock.

2. The use requirements of subsection A, paragraph 2 of this section shall be applied to the house or apartment which the taxpayer was entitled to occupy as such stockholder.

H. For the purposes of this section, the destruction, theft, seizure, requisition or condemnation of property shall be treated as the sale of such property.

I. In the case of property only a portion of which, during the eight-year period ending on the date of the sale or exchange, has been owned and used by the taxpayer as his or her principal residence for periods aggregating five years or more, this section shall apply with respect to so much of the gain from the sale or exchange of such property as is determined, pursuant to regulations prescribed by the department, to be attributable to the portion of the property so owned and used by the taxpayer.

J. In the case of any sale or exchange:

1. The determination of whether an individual is married shall be made as of the date of the sale or exchange.

2. An individual legally separated from his or her spouse under a decree of separate maintenance shall not be considered as married.

K. In applying ' 43-152, subsection (n), relating to the sale or exchange of residence, the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this section, reduced by the amount of gain not included in gross income pursuant to an election pursuant to this section.

L. The provisions of this section shall be applicable to only one sale or exchange during the lifetime of the taxpayer.

(a) Forgiveness of indebtedness and commodity credit loans

(1) Cancellation of indebtedness. If the indebtedness of a taxpayer is cancelled or forgiven in whole or in part without payment at such a time and under such circumstances that the cancellation did not constitute a gift to the taxpayer, the amount so cancelled or forgiven constitutes income to the extent the value of the property, including franchises, of the taxpayer exceeds his liabilities immediately after the cancellation or forgiveness. The remainder of the amount of indebtedness so cancelled or forgiven, if any, shall be applied in reduction of the basis of the assets to the extent the basis thereof exceeds the value thereof immediately after the cancellation or forgiveness. The reduction shall be made in accordance with regulations prescribed by the tax commission.

(2) Outlawed debt presumed cancelled. If an indebtedness is not paid by the time an action to enforce payment is barred by limitation, the indebtedness shall be considered cancelled or forgiven within the meaning of this title unless it can be established that the period of limitation has been extended by a new promise in writing.

(3) Cancellation of indebtedness by stockholder. If a stockholder or stockholders of a corporation cancels any indebtedness owing to the stockholder or stockholders by the corporation, such cancellation shall not constitute income to the taxpayer except to the extent that the taxpayer received a tax benefit, under this title, from such indebtedness.

(b) Commodity credit loans

(1) Commodity credit loans -- election. Amounts received as loans from the commodity credit corporation shall, at the election of the taxpayer, be considered as income included in gross income for the taxable year in which received.

(2) Effect of election. If the taxpayer exercises the election provided for in paragraph (1) for any taxable year beginning after December 31, 1953, then the method of computing income so adopted shall be adhered to with respect to all subsequent taxable years unless, with the approval of the tax commission, a change to a different method is authorized.

' 43-114. Gross income gross income of nonresidents

(a) Nonresidents, gross income. In the case of nonresidents gross income includes only the gross income from sources within this state.

(b) Nonresidents, intangible income. Income of nonresidents from stocks, bonds, notes, or other intangible personal property is not income from sources within this state unless the property has acquired a business situs in this state, except that if a nonresident buys or sells such property in this state or places orders with brokers in this state to buy or sell such property so regularly, systematically, and continuously as to constitute doing business in this state, the profit or gain derived from such activity is income from sources within this state irrespective of the situs of the property. However, in no case shall transactions extending over a period of less than six months be deemed to constitute doing business in this state.

(c) Nonresident beneficiaries. Income of estates and trusts distributed or distributable to nonresident beneficiaries is income from sources within this state only if distributed or distributable out of income of the estate or trust derived from sources within this state. For the purposes of this section, the nonresident beneficiary shall be deemed to be the owner of intangible personal property from which the income of the estate or trust is derived.

(d) Nonresidents, allocations of income. Gross income from sources within and without this state shall be allocated and apportioned under rules and regulations prescribed by the tax commission.

' 43-115. Income taxes of members of armed forces upon death

In the case of any individual who dies while in active service as a member of the armed forces of the United States, if such death occurred while serving in a combat zone or a result of wounds, disease, or injury incurred while so serving --

(a) the tax imposed by this title shall not apply with respect to the taxable year in which falls the date of his death, or with respect to any prior taxable year ending on or after the first day he so served in a combat zone; and

(b) the tax under this title which is unpaid at the date of his death (including interest, additions to the tax, and additional amounts) shall not be assessed, and if assessed the assessments shall be abated, and if collected shall be credited or refunded as an overpayment.

' 43-123. Repealed by Laws 1973, Ch. 7, ' 2, eff. March 6, 1973

' 43-123.01. Deductibility of dividends received from Arizona business and financing institutions

The income of banks, investment companies and loan associations taxed under the provisions of chapter 5, title 42, shall be deemed subject to taxation under this title for the purposes of determining whether a taxpayer is entitled to a deduction under the provisions of ' 43-123.32 for dividends received by a stockholder of a corporation.

' 43-123.02. Election to amortize expenditures incurred in the acquisition of atmospheric and water pollution control devices, machinery or equipment

(a) General rule. Any taxpayer may elect to amortize the adjusted basis of any device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants based upon a period of sixty months. In computing net income, such amortization shall be allowed as a deduction ratably over the period allowed under this subsection beginning with the month in which such device, machinery or equipment is completed or acquired and is placed in service by the taxpayer. This election shall be indicated by the taxpayer in an appropriate statement in the taxpayer's income tax return for the taxable year of the acquisition or completion and placement in service of such devices, machinery or equipment. An election to discontinue amortization with respect to the remainder of the amortization period is permitted and shall be indicated by an appropriate statement in the taxpayer's income tax return for the taxable year of discontinuance.

(b) Deduction in lieu of depreciation. The deduction provided under subsection shall be in lieu of any allowance for the exhaustion, wear and tear of property used in a trade or business, or of property held for the production of income, including a reasonable allowance for obsolescence as provided under ' 43-123.14.

(c) Certification requirement by the department of health services. In determining the adjusted basis for the purposes of subsection (a), such device, machinery or equipment upon certification by the department of health services as a device, machinery or equipment for the collection and control at the source of atmospheric and water pollutants and contaminants shall include only an amount that is properly attributable to the construction, reconstruction, remodeling, installation or acquisition of such device, machinery or equipment as certified by the department of health services.

A. In computing net income there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity:

1. In the case of a taxpayer engaged in the business of farming, expenditures made for the purpose of soil and water conservation and the prevention of erosion of land used in farming shall be allowed as deductions under this section. For the purposes of this paragraph, the term "expenditures made for the purpose of soil and water conservation and the prevention of erosion" means expenditures for the treatment, moving, or cultivation of earth, including (but not limited to) leveling, grading and terracing, contour furrowing, the construction of diversion channels and drainage ditches, the control and protection of water courses, outlets and ponds, the planting and cultivation of cover and protective crops or windbreaks, the control of weeds and brush and other special or emergency cultivation and tillage; but such term does not include the purchase, construction, installation or improvement of structures, appliances, and facilities made of masonry, concrete, tile, metal, or wood, such as tanks, reservoirs, pipes, conduits, canals, dams, wells, and pumps, which are subject to the allowance for depreciation provided in ' 43-123.14. For the purposes of this paragraph the term "land used in farming" means land used (prior to the expenditure for conservation made by the taxpayer) by the taxpayer or his tenant or the predecessor owner or his tenant for the production of crops, fruits, and similar agricultural products or for the sustenance of livestock.

2. No deduction shall be allowable under this subsection, to a corporation for any contribution or gift which would be allowable as a deduction under ' 43-123.19, subsection A, were it not for the five per cent limitation therein contained and for the requirements therein that payment must be made within the income year.

B. In computing net income there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.

C. The deductions permitted by subsection A of this section shall not be allowed to the extent that they are connected with the production of income not taxable under this title. Proper apportionment and allocation of such deductions with respect to taxable and nontaxable income shall be determined pursuant to ' 43-126, subsection (a), paragraph (5).

D. In computing net income there shall be allowed as a deduction a reasonable amount for ordinary and necessary expenses paid or incurred during the taxable year for additional education or training required for the satisfaction of upgraded professional or occupational requirements. To be eligible to claim the deduction provided by this paragraph, the taxpayer shall be actively engaged in the taxpayer's trade, profession or occupation in the state of Arizona and the purpose of such education must be to maintain or improve a taxpayer's skills or meet the express requirements of the taxpayer's employer. Nothing in this section shall be construed as to allow any educational expenses paid or incurred in regard to sabbatical leave abroad or within the United States, or to meet the minimum educational requirements to qualify for the trade, profession or occupation or to qualify for a new trade, profession or occupation.

' 43-123.04. Deductions for interest

In computing net income there shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness of the taxpayer. However, no deduction shall be allowed to the extent that it is connected with income not taxable under this title. The proper apportionment and allocation of the deduction with respect to taxable and nontaxable income shall be determined under rules and regulations prescribed by the tax commission.

' 43-123.05. Deductions for taxes

In computing net income there shall be allowed as a deduction taxes or licenses paid or accrued during the taxable year, except:

1. Taxes on or according to or measured by income or profits paid or accrued within the taxable year imposed by the authority of the government of any foreign country, or any state, other than the state of Arizona, any territory, or taxing subdivision of any such state or territory.

2. Estate, inheritance, legacy, succession, and gift taxes.

3. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

This does not exclude the allowance a s a deduction of so much of the taxes assessed against local benefits as is properly allocable to maintenance or interest charges, nor does this exclude the allowance of any irrigation or other water district taxes or assessments which are levied for the payment of the principal of any improvement or other bonds for which a general assessment on all lands within the district is levied as distinguished from a special assessment levied on part of the area within the district.

4. Taxes imposed as employee contributions under the Federal Insurance Contributions Act, the Railroad Retirement Tax Act, and taxes imposed on self-employment income under the Self-employment Contributions Act of 1954. Taxes imposed for this purpose include amounts levied for old age, survivors, disability insurance, and hospital insurance under the Social Security Act of the United States.

' 43-123.06. Deductions for sales and other taxes separately stated

In computing net income there shall be allowed as a deduction any tax imposed by any state, territory, district or possession of the United States, or any political subdivision thereof, upon persons:

1. Engaged in selling tangible personal property at retail, which is measured by the gross sales price or the gross receipts from the sale, or which is a stated sum per unit of such property sold; or

2. Engaged in furnishing services at retail, which is measured by the gross receipts for furnishing such services; or

3. Purchasing services or tangible personal property at retail which is measured by the gross receipts or gross sales price or which is a stated sum per unit of value sold, if the amount of the tax is separately stated, and if purchased otherwise than in connection with the consumer's trade or business. The amount of such tax paid by the consumer subject to the conditions in this paragraph shall be the deductions allowed. To such consumer the amount shall be allowed as a deduction in computing his net income as if the amount constituted a tax imposed upon and paid by him.

' 43-123.07. Deductions for losses by individuals

In computing net income there shall be allowed as a deduction in the case of an individual losses sustained during the taxable year and not compensated for by insurance or otherwise:

1. If incurred in trade or business; or

2. If incurred in any transaction entered into for profit, though not connected with the trade or business; or

3. Of property not connected with the trade or business, if the loss arises, from fires, storms, shipwreck, or other casualty, or from theft; or

4. If incurred by reason of the destruction or seizure of property, on or after December 7, 1941, in the course of military or naval operations by the United States or any other country engaged in time of war, subject to the rules and regulations prescribed by the tax commission.

The basis for determining the amount of deduction for losses sustained, to be allowed under this section, shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

A. In computing net income there shall be allowed as a deduction in the case of a corporation, losses sustained during the income year and not compensated for by insurance or otherwise.

B. The basis for determining the amount of deduction for losses sustained, to be allowed under this section, shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

A. Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in ' 43-157.

B. If any securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for the purposes of this title, be considered as a loss from the sale or exchange, on the last day of the taxable year, of capital assets.

C. "Securities", as used in this section, means shares of stock in a corporation, and rights to subscribe for or to receive such shares.

' 43-123.10. Deductions for wagering losses

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

' 43-123.11. Deductions for sixty day sales

In the case of any loss claimed to have been sustained in any sale or disposition of property where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property and the property acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed unless the claim is made by a taxpayer, a dealer in such property, and with respect to a transaction made in the ordinary course of his business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. Upon the subsequent sale or disposition of such property, in respect of which a loss has been disallowed, the basis for measuring gain or loss in the case of property so acquired shall be the basis in the case of the property so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

A. In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty days before the date of the sale or disposition and ending thirty days after that date, the taxpayer has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law) or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under ' 43-123.07, paragraph 2; nor shall such deduction be allowed under ' 43-123.08 unless the claim is made by a corporation, a dealer in stocks or securities and with respect to a transaction made in the ordinary course of its business.

B. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the loss from the sale or other disposition of which is not deductible shall be determined under rules and regulations prescribed by the tax commission.

C. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is not less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility of the loss shall be determined under the rules and regulations prescribed by the tax commission. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. Upon the subsequent sale or disposition of shares of stock or securities, in respect of which a loss has been disallowed, the basis for measuring gain or loss in the case of property so acquired shall be the basis in the case of the shares or securities so sold or disposed of, except that if the repurchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

A. In computing net income there shall be allowed as a deduction debts which become worthless within the taxable year or, in the discretion of the tax commission, a reasonable addition to a reserve for bad debts. When satisfied that a debt is recoverable only in part, the tax commission may allow the debt as a deduction in an amount not in excess of the part charged off within the taxable year as a deduction. If a debt was actually worthless prior to January 1, 1954, but was not ascertained to be worthless and charged off prior to that date, a deduction may be taken therefor during the first taxable year ending after December 31, 1953; if a portion of a debt is claimed and allowed as a deduction in any year no deduction shall be allowed in any subsequent year for any portion of the debt which was charged off, regardless of whether or not claimed as a deduction in any prior year. This subsection does not apply to a debt evidenced by a security as defined in subsection C. If a nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange during the taxable year of a capital asset held for not more than six months. The term "nonbusiness debt" means a debt other than a debt evidenced by a security and other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. The basis for determining the amount of deduction allowed under this subsection shall be the adjusted basis provided in ' 43-153(b) for determining the loss from the sale or other disposition of property.

B. If any securities, as defined in subsection C become worthless within the taxable year and are capital assets, the loss resulting shall be considered as a loss from the sale or exchange, on the last day of the taxable year, of capital assets.

C. "Securities", as used in subsections A and B means bonds, debentures, notes, 6C certificates, or other evidences of indebtedness, issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form.

D. This section shall not apply in the case of a taxpayer, other than a bank, as defined in ' 104, of the Internal Revenue Cod