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The Arizona Department of Revenue presented Arizona Tax Talk '98 in Phoenix, Arizona, on November 30 and December 1, 1998. The forum included concurrent sessions presented by representatives of the Arizona DOR and the IRS on many topics, including personal income tax credits, legislative updates, audit and appeals processes, collection issues, customer services, penalty review, unclaimed property, and electronic filing. In addition, the forum opened with a presentation by Mark W. Killian, Director of the Arizona DOR, and featured a keynote address by William Raby on the relationship of community property to tax issues.

Arizona DOR Director's Comments

Mark W. Killian opened the forum with brief remarks on the future plans for the Arizona DOR. He indicated the two primary goals for the Department are to conduct business with the highest ethical standard, and to create an internal cultural change for customer service. In referring to taxpayers as the Department's customers, Killian said he wants the Department to be "just like Wal-Mart." Killian further outlined the recent changes in the Department including a program for rewarding good employees, based on public feedback on their performance and an increase in the number of seminars being conducted by the Community OutReach and Education Section (CORE). He noted the importance of CORE's work, noting that "welleducated taxpayers come into compliance."

Killian next addressed the issues that he would like to see implemented in the future by the Department. Departmental issues included upgrading the computer system for the Department for faster records availability (citing Kansas, where all taxpayer records are available via computer in no more than nine seconds) and completely paperless transaction privilege (sales) tax filing (such as in Washington). The primary roadblock to implementation of these programs is funding, he indicated. Killian also set out several issues that he would like to see addressed by the legislature, including innocent spouse relief, creation of a practitioner privilege, a six-year statute of limitations on collections, and an equalization of the interest rates for overpayment and underpayment of taxes.

Killian concluded his remarks by stressing the importance of practitioners and taxpayers keeping open lines of communication with the Department and giving feedback on employee performance, both positive and negative.

Community Property and Taxes

William L. Raby of the Arizona State Board of Tax Appeals presented the keynote speech at the forum's luncheon on the topic of the application of community property laws to tax liability. He initially noted that nine states currently have some type of community property laws in effect (10, if Oklahoma is considered a community property state), though the substance and treatment of such laws very greatly between the jurisdictions. Raby cautioned against the general practice of Arizona spouses titling property in joint tenancy because such property would not be considered community property for federal tax purposes, and the survival transfer benefits of joint tenancy (or tenancy by the entireties) is already addressed by the community property laws.

Raby addressed three recent cases dealing with federal taxation as examples of the difficulties in dealing with the tax ramifications of community property. In Condello, T.C. Memo 1998-333, No. 98-28659, a Texas taxpayer filed a 1992 federal return separate from his estranged wife, claiming only half of the community income. Due to an error in notification by the IRS, the taxpayer won and was only liable for taxes on half of the community income, despite the fact his estranged wife received none of the income and received no benefits from it. Raby also noted that community property laws have an impact on gift and estate taxes as well as income taxes (see In re Kenly, 81 AFTR2d Par. 98-454, No. 98-7984 (9th Cir. 1998) and In re Street, 82 AFTR2d Par. 985264, No. 98-27409 (5th Cir. 1998)).

Raby also discussed the issue of community property as it related to Arizona tax matters. He discussed the issue of joint tenancy and indicated Arizona had changed its law to allow community property with rights of survivorship, as a recognition by the state of the tax difficulties being caused by the placement of property into joint tenancy Raby also mentioned Arizona Individual Income Tax Ruling 93-22, which states that Arizona does not follow IRC 666 for tax years beginning prior to January 1, 1990, and does follow the section for tax years beginning after 1989 for spouses filing separate individual income tax returns. IRC 66 sets out three situations where community income will be treated as separate income. The first is where the spouses have been separated for the entire year, and certain other criteria are met. The second is where one spouse fails to notify the other of the community income. The third is where, under the circumstances, it would be inequitable to one of the spouses to treat income as community income.

Raby also highlighted Van Slyck, No. 1652-97-I, Arizona State Board of Tax Appeals, February 10, 1998. In Van Slyck, the taxpayers were spouses filing a joint return. Each spouse claimed a $2,500 subtraction from gross income attributable to a pension paid to the husband from the University of Arizona. The Department claimed the taxpayers were limited to the statutory deduction of $2,500 total, rather than $2,500 per spouse. The Board held the pension was community income and, as such, each spouse was entitled to a $2,500 deduction.

In conclusion, Raby emphasized the need to make sure community property remains such, and is not transformed into individual property. He suggested use of qualified domestic relations orders to clarify property tax issues before a taxable event takes place. Finally, Raby cautioned practitioners to get at least a basic knowledge of community property laws and their implications, recommending documented consultations with knowledgeable third parties as appropriate.

Schools and Welfare Personal Income Tax Credits

Rob Robinson of the Department discussed school tax credits and welfare reform tax credits. The public school fee tax credit is a credit against Arizona individual income tax for up to $200 for payment of fees to an Arizona public school to support extracurricular activities. Extracurricular activities are schoolsponsored activities that require an enrolled student to pay a fee to participate. In order to qualify for the credit, a taxpayer must make a payment directly to the school, and receive a receipt. Monies paid to an organization other than the school itself do not qualify for the credit. Arizona Form 322 is used when claiming the credit. Robinson noted the credit is available for parents who pay fees for their own child for extracurricular activities at a public school. He also stated the future of this credit is somewhat in doubt due to its connection to the private school tuition credit, which is currently being challenged before the Arizona Supreme Court.

The private school tuition credit allows for an individual income tax credit of up to $500 for a cash contribution to a school tuition organization that provides scholarships or grants to qualified schools. A school tuition organization is one that is exempt under IRC 501(c)(3), allocates at least 90% of its annual revenue to scholarships or grants, and makes such scholarships and grants available to students of more than one qualified school. Qualified schools are non-governmental Arizona primary and secondary schools that do not discriminate on the basis of race, color, handicap, familial status, or national origin. Robinson noted that due to a recent amendment, single-sex schools now qualify. Arizona Form 323 is used when claiming the credit. The taxpayer contribution cannot be designated for the direct benefit of the taxpayer's dependent in order to quality. Robinson indicated the credit is currently being challenged and the Arizona Supreme Court heard arguments in the case in December 1997, but has not yet issued a decision. He suggested that if the court decided to declare the private school credit unconstitutional, it might also strike down the public school credit due to the relationship between the two credits. In response to an audience question, he indicated that, should the court strike down one or both credits after the filing of 1998 individual income tax returns, the Department would require payment of the amount claimed as a credit by taxpayers, but would not seek penalties.

Qualifying Charity Contribution Credit