[419] HOLOHAN, Justice.
Appellees here are three subsidiaries of Transamerica Corporation within the meaning of federal income tax laws. During the tax years in question, appellees joined with the parent corporation in the filing of consolidated federal income tax returns pursuant to 26 U.S.C. §§ 1501 — 4. The subsidiaries computed their separate federal income tax return as though they were not members of an affiliated group. They forwarded to the parent this return and a check to the parent for the appropriate amount. The parent corporation did not file this separate return but, pursuant to federal law, filed a consolidated return as adjusted by any losses incurred by any of its subsidiaries. Due to these adjustments, the aggregate of the payments from the subsidiaries exceeded the consolidated tax liability for the tax years in question.
However, each subsidiary deducted from its separate Arizona tax return, as federal taxes paid or incurred, the amounts paid to the parent corporation. The Arizona Department of Revenue challenged this practice for the first time in 1974, contending that the allowable deduction was a proportionate share, calculated by the “net-to-net” method, of the federal income taxes actually paid to the federal government by the parent pursuant to its consolidated return. Appellees appealed to the Board of Tax Appeals which affirmed the Department and then to the superior court. The superi- or court ruled that the amounts paid to the parent were deductible as either “taxes paid or accrued” or “ordinary and necessary business expenses.” The superior court also found that if the Department’s position should prevail on appeal, appellees‘should be allowed to deduct their share of the consolidated federal tax liability without reduction for foreign tax credits and investment tax credits. Upon appeal by the Department, the Court of Appeals stated, “Were there no factors separate and apart from the literal language of the statute to guide our decision in this case, we would be inclined toward the adoption of the interpretation urged by the Department of Revenue as constituting an interpretation that more reasonably approaches the intent expressed in A.R.S. § 43-123(c).” (Footnote omitted.) The Court of Appeals, however, upheld the method used by appellees because the Department had not promulgated rules and regulations in this area. Arizona Dept. of Revenue v. Transamerica, 124 Ariz. 428, 604 P.2d 1139 (App.1979). We granted the petition of the state for review. The opinion of the Court of Appeals is vacated.
The issues on appeal are:
1. Is the amount properly deductible as federal income taxes “paid or accrued” the subsidiaries’ proportionate share of the amount paid by the parent to the federal government or the amount paid by the subsidiaries to the parent as computed by their separate but unfiled return?
2. If not deductible as federal income taxes, is the proportionate share of the amount properly paid to the parent in excess of the consolidated tax liability deductible as an ordinary and necessary business expense or is it a dividend?
3. Was the issue of proper application of the foreign tax credit and investment tax credit properly raised at the trial court level?
4. If so, should the subsidiaries’ deduction for federal income taxes “paid or accrued” be calculated before or after investment tax credits and foreign tax credits are taken?
As to the first issue, the relevant statute is former A.R.S. § 43-123(c) which read, in part:
“In computing net income there shall be allowed as a deduction taxes or licenses paid or accrued during the taxable year
Former A.R.S. § 43-101(n) provided that “paid or accrued” shall be construed according to the method of accounting upon which the net income is computed. A.R.S. § 43-131(a) stated that:
“The net income shall be computed . in accordance with the method of accounting regularly employed . but ... if the method employed [420] does not reflect the proper income, the computation shall be made in accordance with such method as in the opinion of the tax commission does reflect the proper income.”
Appellees contend that because they use the accrual method, an ordinary and standard method of accounting, taxes are “paid or accrued” on the date entered on the books of the company regardless of whether the sums “accrued” ever reach the coffers of the federal government. In support of this position, appellees cite State v. Airesearch Manufacturing Co., Inc., 68 Ariz. 342, 206 P.2d 562 (1949) for the proposition that “If the deduction of federal income tax is made on an accrual basis, then ‘paid’ or ‘actually paid’ means that the federal income taxes are deemed to have been ‘paid’ on the date of accrual as entered on the books of the company.” 68 Ariz. at 347, 206 P.2d 562.
However, the issue in Airesearch was whether the taxpayer was required to deduct its federal income taxes on a cash or accrual basis or whether it could choose which method to use. The court’s holding turned on the tax commission’s regulation on the subject. Also, apparently the federal income taxes in that case were actually paid to the Internal Revenue Service at some point in time. The issue in the present case is not determined by whether the taxpayer is on an accrual or cash basis. The issue is the amount of tax ultimately paid.
A tax is the enforced contribution of persons and property levied by the authority of the state. Hunt v. Callaghan, 32 Ariz. 235, 257 P. 648 (1927). The right to a deduction does not exist in the absence of statutory authorization, and a deduction will not be allowed for items not within the terms of the statute. Arizona State Tax Commission v. Kieckhefer, 67 Ariz. 102, 191 P.2d 729 (1948).
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[419] HOLOHAN, Justice.
Appellees here are three subsidiaries of Transamerica Corporation within the meaning of federal income tax laws. During the tax years in question, appellees joined with the parent corporation in the filing of consolidated federal income tax returns pursuant to 26 U.S.C. §§ 1501 — 4. The subsidiaries computed their separate federal income tax return as though they were not members of an affiliated group. They forwarded to the parent this return and a check to the parent for the appropriate amount. The parent corporation did not file this separate return but, pursuant to federal law, filed a consolidated return as adjusted by any losses incurred by any of its subsidiaries. Due to these adjustments, the aggregate of the payments from the subsidiaries exceeded the consolidated tax liability for the tax years in question.
However, each subsidiary deducted from its separate Arizona tax return, as federal taxes paid or incurred, the amounts paid to the parent corporation. The Arizona Department of Revenue challenged this practice for the first time in 1974, contending that the allowable deduction was a proportionate share, calculated by the “net-to-net” method, of the federal income taxes actually paid to the federal government by the parent pursuant to its consolidated return. Appellees appealed to the Board of Tax Appeals which affirmed the Department and then to the superior court. The superi- or court ruled that the amounts paid to the parent were deductible as either “taxes paid or accrued” or “ordinary and necessary business expenses.” The superior court also found that if the Department’s position should prevail on appeal, appellees‘should be allowed to deduct their share of the consolidated federal tax liability without reduction for foreign tax credits and investment tax credits. Upon appeal by the Department, the Court of Appeals stated, “Were there no factors separate and apart from the literal language of the statute to guide our decision in this case, we would be inclined toward the adoption of the interpretation urged by the Department of Revenue as constituting an interpretation that more reasonably approaches the intent expressed in A.R.S. § 43-123(c).” (Footnote omitted.) The Court of Appeals, however, upheld the method used by appellees because the Department had not promulgated rules and regulations in this area. Arizona Dept. of Revenue v. Transamerica, 124 Ariz. 428, 604 P.2d 1139 (App.1979). We granted the petition of the state for review. The opinion of the Court of Appeals is vacated.
The issues on appeal are:
1. Is the amount properly deductible as federal income taxes “paid or accrued” the subsidiaries’ proportionate share of the amount paid by the parent to the federal government or the amount paid by the subsidiaries to the parent as computed by their separate but unfiled return?
2. If not deductible as federal income taxes, is the proportionate share of the amount properly paid to the parent in excess of the consolidated tax liability deductible as an ordinary and necessary business expense or is it a dividend?
3. Was the issue of proper application of the foreign tax credit and investment tax credit properly raised at the trial court level?
4. If so, should the subsidiaries’ deduction for federal income taxes “paid or accrued” be calculated before or after investment tax credits and foreign tax credits are taken?
As to the first issue, the relevant statute is former A.R.S. § 43-123(c) which read, in part:
“In computing net income there shall be allowed as a deduction taxes or licenses paid or accrued during the taxable year
Former A.R.S. § 43-101(n) provided that “paid or accrued” shall be construed according to the method of accounting upon which the net income is computed. A.R.S. § 43-131(a) stated that:
“The net income shall be computed . in accordance with the method of accounting regularly employed . but ... if the method employed [420] does not reflect the proper income, the computation shall be made in accordance with such method as in the opinion of the tax commission does reflect the proper income.”
Appellees contend that because they use the accrual method, an ordinary and standard method of accounting, taxes are “paid or accrued” on the date entered on the books of the company regardless of whether the sums “accrued” ever reach the coffers of the federal government. In support of this position, appellees cite State v. Airesearch Manufacturing Co., Inc., 68 Ariz. 342, 206 P.2d 562 (1949) for the proposition that “If the deduction of federal income tax is made on an accrual basis, then ‘paid’ or ‘actually paid’ means that the federal income taxes are deemed to have been ‘paid’ on the date of accrual as entered on the books of the company.” 68 Ariz. at 347, 206 P.2d 562.
However, the issue in Airesearch was whether the taxpayer was required to deduct its federal income taxes on a cash or accrual basis or whether it could choose which method to use. The court’s holding turned on the tax commission’s regulation on the subject. Also, apparently the federal income taxes in that case were actually paid to the Internal Revenue Service at some point in time. The issue in the present case is not determined by whether the taxpayer is on an accrual or cash basis. The issue is the amount of tax ultimately paid.
A tax is the enforced contribution of persons and property levied by the authority of the state. Hunt v. Callaghan, 32 Ariz. 235, 257 P. 648 (1927). The right to a deduction does not exist in the absence of statutory authorization, and a deduction will not be allowed for items not within the terms of the statute. Arizona State Tax Commission v. Kieckhefer, 67 Ariz. 102, 191 P.2d 729 (1948).
The precise issue presented, whether a subsidiary whose parent files a consolidated tax return can deduct as federal income taxes “paid or accrued” the amount forwarded to the parent, can arise at present only in five states, see 1 Prentice Hall, State & Local Taxes ¶ 230 (1977). However, Alabama, California, Kansas, Louisiana, Minnesota, Missouri, Utah and Wisconsin have ruled on substantially the same issue presented in this case. Five of these states have held that a subsidiary can deduct only its proportionate share of the federal income taxes actually paid by the parent. State v. Western Grain Co., 55 Ala.App. 690, 318 So.2d 719, writ denied 294 Ala. 770, 318 So.2d 722 (1975), appeal dismissed 424 U.S. 960, 96 S.Ct. 1452, 47 L.Ed.2d 728 (1976); Standard Oil Co. v. State, 55 Ala.App. 103, 313 So.2d 532, writ denied 294 Ala. 770, 313 So.2d 540 (1975); Continental Telephone Co. of Utah v. State Tax Commission, 539 P.2d 447 (Utah 1975); Trunkline Gas Co. v. Collector of Revenue, 182 So.2d 674 (La.App.1965), aff’d., 248 La. 1101, 184 So.2d 25 (1966); Buick Motor Co. v. City of Milwaukee 48 F.2d 801 (7th Cir.), cert. denied 284 U.S. 655, 52 S.Ct. 34, 76 L.Ed. 556 (1931); Corp. of America v. Johnson, 7 Cal.2d 295, 60 P.2d 417 (1936).
Two states have considered the reverse of the situation at hand. Armco Steel Corp. v. State Tax Commission, 580 S.W.2d 242 (Mo. 1979), and Northern Natural Gas Co. v. Commissioner of Revenue, 251 N.W.2d 125 (Minn.1977). The parent corporation in each of the cited cases required its subsidiaries to compute the tax due based on their income if filed separately and remit the amount to the parent. A consolidated return was filed, but the total consolidated income was reduced by losses suffered by some of the subsidiaries, and the consolidated tax due was reduced. The parent corporation took the difference between the federal tax actually paid and that sent by the subsidiaries and remitted the balance to the subsidiaries with losses in proportion to the amount that the subsidiaries' loss decreased the group’s ultimate tax liability. The parent corporations sought to claim these payments as deductions for federal taxes paid. The Minnesota and Missouri supreme courts held the payments were not deductible. All of these cases interpreted statutory language similar to ours and rejected the argu[421] ments asserted by appellees in the case at hand.
The Kansas Supreme Court, however, in Cities Service Gas Co. v. McDonald, 204 Kan. 705, 466 P.2d 277 (1970), rejected the arguments of the department of revenue and held that Cities Service Gas Company was entitled to take a deduction for federal income taxes accrued or incurred based on a separate return computation despite the fact that the company actually joined the parent in the filing of a consolidated federal income tax return. This decision, like the Court of Appeals decision in the case at bar, was based primarily on two factors: the Kansas director of revenue had not “seen fit” to promulgate a regulation instructing corporate taxpayers on the amount of the allowable deduction for consolidated federal returns, and the corporate taxpayer had claimed its federal income tax deduction in the same manner unchallenged since 1958.
Although these factors are present in the case at hand, we do not find them persuasive. As was stated in Miami Copper Co. Division, Tennessee Corp. v. State Tax Commission, 121 Ariz. 150, 589 P.2d 24 (App.1978), inaction by an administrative agency does not constitute a construction of the statute, favorable or otherwise.
An argument similar to appellees’ regarding accrual was asserted in Corp. of America v. Johnson, 7 Cal.2d 295, 60 P.2d 417 (1936). California at that time allowed a deduction for federal income taxes accrued during the taxable year. While the subsidiary had substantial net income for the year in question, the affiliated group as a whole showed no consolidated taxable income. The California court held that the subsidiary did not accrue federal income tax liability.
We hold, as did the majority of these states, that the phrase “paid or accrued” means amounts paid from the parent to the federal government. This is in accord with general tax law that deems a tax accrued when all events have occurred which fix the amount of the tax. Mertens, Law of Federal Income Taxation, Vol. 2 § 12.60. Appellees’ actual tax liability is not fixed until the consolidated return in which the amount the federal government actually will receive is determined has been prepared.
Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders § 15.23 (4th ed. 1979) states that the basic concept underlying the Internal Revenue Code provisions allowing a consolidated federal income tax return is:
“[T]hat the consolidated group constitutes in substance, a single taxable enterprise, despite the existence of technically distinct entities; as such, its tax liability ought to be based on its dealings with ‘outsiders,’ rather than on intragroup transactions. This ‘single taxpayer’ concept lies at the heart of the treatment, both past and present, of intercompany transactions which, in general, are eliminated in computing the group’s consolidated taxable income. In effect, the results are not unlike the ‘joint return’ treatment of a husband and wife.”
We agree with the foregoing authorities that the consolidated group should be treated as a single taxable enterprise for purposes of the Arizona deduction for federal income taxes paid or accrued and federal income tax liability does not accrue until the consolidated return is filed. Appellees’ deduction for purposes of A.R.S. § 43-123(c) is therefore limited to their proportionate share of the consolidated tax liability.