Arizona Business Gazette
July 28, 2011
by Howard Fischer
The prime mover behind the fund to have the state build its own border fence is telling would-be donors they may be able to get a tax deduction out of the whole thing.
But a couple of attorneys with an expertise in tax law say those who decide to list the donations, and reduce what they owe the federal and state government, could wind up with a rude surprise.
The state website set up by Sen. Steve Smith, R-Maricopa, includes a statement from state Comptroller D. Clark Partridge declaring that, under the Internal Revenue Code, the definition of a charity includes contributions made to a state "if such gift is made exclusively for public purposes." Partridge said Arizona law defines charitable contributions the same as federal rules.
Smith said that, legally speaking, he cannot tell someone that a specific donation qualifies as deductible.
"When you read the comptroller's letter, there's a precedent out there that when you give to a state or a subdivision of - which clearly this would be - it's tax-deductible," he said. "They pretty much say it in black and white."
Partridge, however, takes pains to ensure he does not go that far.
"Although it is not the function of the state to give legal or tax advice, a donation made to the state of Arizona to support a public purpose may qualify as a deduction in determining the donor's federal and Arizona taxable income," he wrote. "Donors should consult with their legal and/or tax advisers for guidance."
Attorney and tax practitioner Bob Kamman said that, on the surface, donations for the state to build a wall would appear to qualify. But, he said, the legislation setting up the fund is not clear enough to assure the Internal Revenue Service, which will review the tax returns, that the money really is going to the state.
He pointed out that the law establishes the Border Security Trust Fund, administered by the treasurer. And the state can be the beneficiary of this fund.
But he also said that the legislation allows Arizona to enter a compact with other border states to pool resources.
In that case, Kamman said, the compact also could be a beneficiary. But the compact organization, unlike the state, does not automatically have tax-exempt status and would have to apply for such a designation.
Kamman said the IRS would be likely to grant it tax-exempt status.
"But that process may take years and may not be retroactive," he said. "I would not assure my clients that gifts to the Border Security Trust Fund, even though administered by the Arizona state treasurer, are deductible on their federal income-tax returns."
That also is the assessment of attorney and tax specialist David Kozak.
He said the whole idea behind the deduction for gifts to governments is largely to benefit those who make donations, like land for public schools, parks and fire stations. He said there is no real precedent among tax-law cases on whether a border fence would qualify.
But Kozak's reasoning in warning off clients goes beyond the tax code itself. He said the whole thing could take on political implications.
He said the deduction is likely to be questioned.
"Assuming the administration and the (U.S.) Treasury is not happy about the border fence - which apparently they're not - it's really easy for them to just deny the deduction," Kozak said. "And then, it will go to trial."
Ultimately, he said, whoever loses there will take the case to the 9th U.S. Circuit Court of Appeals.
"And you can guess as well as anyone else what they're going to do," Kozak said. "They're generally thought of as the most liberal of any court of appeals."
At that point, he said, the taxpayer is going to have to make a decision.
"If anyone has enough money in this to make it worth their while, it will go up in front of the U.S. Supreme Court," Kozak said. "But that's years down the road."
He said that, for most taxpayers, the amount of money they would save by taking a deduction on a border-fence donation would not be worth the legal fees involved.