Does a New Mexico estate owe interest on estate tax paid late under a valid filing extension, when a botched by-pass trust and confusion over the estate's obligations caused the delay?

Plain-English summary

The Estate of Inez Van Tubergen owed interest on its New Mexico estate tax even though it paid under a valid extension and had sympathetic reasons for the delay — because interest is mandatory, an extension does not stop it, and the Department never promised a waiver. Protest DENIED. (No penalty was assessed.)

Mrs. Van Tubergen, an Albuquerque resident, died in September 1999. Her estate would have owed no estate tax if a "by-pass" trust from her late husband's will had been set up — but the attorney who handled the husband's estate never established it, leaving the estate liable for federal and New Mexico estate tax. The personal representative, who lived in Maryland, tried to reopen the husband's estate to create the trust retroactively, but the responsible attorney vanished from his firm and the effort failed. The federal (and thus New Mexico) filing deadline was extended six months. The estate paid its federal tax on time in June 2000 but did not file or pay New Mexico estate tax until December 15, 2000 — the last day of the extended period — remitting $22,284.23. The Department then assessed $1,656.55 of interest for June 15–December 15, 2000. Because the estate had a valid extension and valid reasons, no penalty was assessed.

Interest is mandatory — and an extension does not stop it

Section 7-1-67 says interest "shall be paid" on tax not paid by its due date, "without regard to any extension of time." "Shall" makes it mandatory (State v. Lujan), and Section 7-1-13(E) confirms that an extension "shall not prevent the accrual of interest." The Department's own Estate Tax Report (Form 41058) warned that interest of 1.25% per month is due on estate tax paid after the original due date and that "an extension of time, federal or state, does not waive the accumulation of interest." Interest is not a penalty; it compensates the state for the time value of money it was owed — in effect the state made an involuntary six-month loan on which interest was statutorily due.

The Department did not mislead the estate

The estate argued it received inadequate advice. The evidence showed the opposite: the Department's estate-tax employee ("Katy") correctly advised the accountant to get a filing extension if the trust issue was unresolved — which saved the estate a $2,228.42 late-filing penalty — and later, when the accountant said they were "lost as to our requirements to even file a return," reasonably advised retaining a New Mexico attorney. It was unreasonable to expect a Department employee to resolve complex trust and probate questions. New Mexico is a self-reporting system: taxpayers must determine their own liabilities and, if they lack the knowledge, consult a qualified professional (Tiffany Construction). The representative's claim that she could not find a New Mexico attorney was unconvincing, given resources like the State Bar's specialist list.

An assumption is not a promise

The estate said the Department led it to believe interest would be waived. In fact, a Department contact only said the estate could write a letter requesting a waiver, reviewed case by case. The representative and accountant "assumed" the interest would be waived — but an assumption is not a Department promise, especially against the form's clear warning that extensions do not waive interest. There was no basis to find the Department responsible for the delay or estopped from collecting interest.

Result: protest DENIED. The $1,656.55 of interest stood; no penalty was assessed.

What this means for you

A filing extension buys time to file, not relief from interest

For New Mexico estate tax (and taxes generally), an extension postpones the filing deadline but does not stop interest. Under Sections 7-1-67 and 7-1-13(E), interest runs from the original due date until the tax is paid.

Pay an estimate by the original due date to limit interest

If you expect to owe estate tax, paying your best estimate by the original due date — even while sorting out trusts, valuations, or probate — limits the interest that accrues during an extension.

The Department is not your tax advisor

Its employees can point you to forms, extensions, and the need for professional help, but they will not resolve complex legal questions or compute your liability. In a self-reporting system, that responsibility — and the duty to hire a qualified professional — is yours.

Get any promised relief in writing

Being told you "may request" a waiver is not the same as being granted one. Do not assume interest will be forgiven; the statutory default is that it is due.

Common questions

Q: What tax was involved?
A: New Mexico estate tax — $22,284.23 paid on December 15, 2000, with $1,656.55 of interest assessed for the June 15–December 15, 2000 period.

Q: Why was interest due if the estate had a valid extension?
A: An extension only postpones filing. Under Sections 7-1-67 and 7-1-13(E), interest still accrues from the original due date; an extension "shall not prevent the accrual of interest."

Q: Why was no penalty charged?
A: The estate had a valid extension and legitimate reasons for the delay, so the Department did not assess a negligence penalty under Section 7-1-69. Interest, however, is separate and mandatory.

Q: Did the Department give bad advice?
A: No. Its employee correctly advised getting an extension and retaining a New Mexico attorney. It was not the Department's job to resolve the estate's trust and probate problems.

Q: Wasn't the estate told interest would be waived?
A: No. It was told it could request a waiver, reviewed case by case. The estate merely assumed the waiver would be granted, which is not a promise — and the form clearly stated extensions do not waive interest.

Citations and references

Statutes:

• NMSA 1978, § 7-1-67 — interest on late-paid taxes ("shall be paid"; accrues without regard to any extension)
• NMSA 1978, § 7-1-13(E) — the Secretary may extend due dates, but "no extension shall prevent the accrual of interest"
• NMSA 1978, § 7-1-69 — negligence (10%) and fraud (50%) penalties
• NMSA 1978, § 7-1-17 — a Department assessment is presumed correct
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty
• NMSA 1978, § 7-1-13(B) — taxpayer's self-reporting obligation

Cases cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Estate of Inez S. Van Tubergen
• Decision PDF: D&O 02-15

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
ESTATE OF INEZ S. VAN TUBERGEN No. 02-15
ASSESSMENT NO. 21390

DECISION AND ORDER

A formal hearing on the above-referenced protest was held June 12, 2002, before Margaret

B. Alcock, Hearing Officer. The Estate of Inez S. Van Tubergen (“Taxpayer”) was represented by

Katherine Y. Benny-Dell, the estate’s personal representative. The Taxation and Revenue

Department ("Department") was represented by Javier Lopez, Special Assistant Attorney General.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Inez S. Van Tubergen died September 15, 1999. At the time of her death, Mrs. Van

Tubergen was a resident of Albuquerque, New Mexico.

2. Katherine Y. Benny-Dell, who lives in Maryland, was appointed as the personal

representative of her mother’s estate.

3. The due date for reporting and paying estate tax due to the federal government and

the State of New Mexico was June 15, 2000.

4. After Mrs. Van Tubergen’s death, it was discovered that the attorney who handled

the estate of Mrs. Van Tubergen’s deceased husband had failed to establish a “by-pass” trust set up

in the husband’s will.

5. A by-pass trust is an estate planning tool commonly used to minimize the amount of

estate tax paid on the combined assets of married couples. Had the trust been established, no tax
would have been due on Mrs. Van Tubergen’s estate. Without the trust, the estate owed estate tax to

both the federal government and the State of New Mexico.

6. Ms. Benny-Dell hired an attorney in an Albuquerque law firm to explore the

possibility of reopening the estate of Mrs. Van Tubergen’s husband to establish the by-pass trust

retroactive to the date of his death, thereby avoiding the payment of estate tax on Mrs. Van

Tubergen’s estate.

7. Ms. Benny-Dell never heard back from the Albuquerque attorney. After numerous

telephone calls, she learned that he was no longer with the law firm and had left no forwarding

address. Ms. Benny-Dell spoke to the firm’s senior partner, but he was not familiar with Ms. Benny-

Dell’s case, nor was he familiar with estate law. The senior partner was subsequently hospitalized

for a period of several months and did not return Ms. Benny-Dell’s telephone calls.

8. In March 2000, Ms. Benny-Dell’s Maryland accountant made several telephone calls

to the New Mexico Taxation and Revenue Department and finally reached an employee named Katy,

who works in the Department’s estate tax unit.

9. On March 24, 2000, the accountant explained the estate’s trust problem to Katy and

told her that he did not know whether the estate would have a liability or whether the estate was

required to file an estate tax return. Katy told the accountant that if the matter were not resolved by

the due date of the estate tax return, he should request an extension of time to file the return.

10. At some point following this conversation, the estate obtained a six-month filing

extension from the IRS, which was also effective to extend the time to file the New Mexico estate

tax return.

11. On April 2, 2000, the accountant left a telephone message for Katy asking for a copy

of the instructions for filing a New Mexico estate tax return. On April 13, 2000, the accountant

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received a copy of New Mexico’s Estate Tax Report, Form 41058. The estate tax return is printed

on the front of the form and the instructions for filling out the return are printed on the back of the

form.

12. The first sentence of the instructions states: “A tax in an amount equal to the federal

credit is imposed on the transfer of the net estate of every resident.”

13. The instructions on Form 41058 also state that interest at the rate of 1.25% per month

will be due on any payment of estate tax made after the original due date and that “an extension of

time, federal or state, does not waive the accumulation of interest.”

14. On June 8 and 9, 2000, the accountant called the Department to ask some additional

questions, but was unable to reach anyone who could help him.

15. On June 14, 2000, the day before the estate tax return was due, the accountant called

Ms. Benny-Dell to determine whether the Albuquerque attorney had made any progress on

establishing the by-pass trust. When Ms. Benny-Dell told the accountant that no progress had been

made, he advised her to go ahead and pay the amount of federal estate tax that would be due if no

trust could be established.

16. On June 14, 2000, the accountant also spoke with Katy in the Department’s estate tax

unit. The accountant later told Ms. Benny-Dell that he “talked with Katy about filing and about the

screw-up the lawyers made with the now-deceased husband’s estate accounting and how we were

lost as to our requirements to even file a return.” Katy responded by advising the accountant to

retain a New Mexico attorney to help him figure out the estate’s tax liability.

17. On June 15, 2000, Ms. Benny-Dell filed the estate’s federal estate tax return, with

full payment. Ms. Benny-Dell did not file a New Mexico estate tax return or make any estimated

payment of New Mexico estate tax.

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18. At some point after her mother’s death, Ms. Benny-Dell bought a book on the

administration of decedents’ estates. The book erroneously stated that New Mexico does not have an

estate tax. Ms. Benny-Dell was confused by the book and thought it might not be necessary to file an

estate tax return with New Mexico.

19. Ms. Benny-Dell subsequently consulted her personal attorney in Maryland about

retaining a New Mexico attorney to help resolve the issue of the by-pass trust. The Maryland

attorney said he did not know any attorneys in New Mexico and told Ms. Benny-Dell to just do the

best she could.

20. Ms. Benny-Dell finally gave up on the plan to establish the by-pass trust.

21. On December 15, 2000, the last day of the extended filing period, the estate filed a

New Mexico Estate Tax Report, Form 41058, with a payment of $22,284.23.

22. On January 17, 2001, the Department issued Assessment No. 21390 to the estate in

the amount of $1,656.55, representing interest due on the late payment of the estate tax originally

due on June 15, 2000. Because the estate had obtained a valid extension of time to file the return, no

penalty was assessed.

23. Ms. Benny-Dell’s accountant told her that someone at the Department told him that

she could request a waiver of the interest by writing a letter to the Department and that such requests

were reviewed on a case-by-case basis.

24. On January 28, 2001, Ms. Benny-Dell filed a written protest to the Department’s

assessment of interest.

DISCUSSION

The issue to be decided is whether the Estate of Inez S. Van Tubergen is liable for the

interest assessed on its late payment of estate tax due to the State of New Mexico. Ms. Benny-Dell

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argues that the estate should be excused from payment of interest because there were extenuating

circumstances for the late payment and because her accountant was not given adequate advice by the

New Mexico Taxation and Revenue Department.

Section 7-1-17 NMSA 1978 provides that any assessment of tax by the Department is

presumed to be correct. Section 7-1-3 NMSA 1978 defines tax to include not only the amount of tax

principal imposed but also “the amount of any interest or civil penalty relating thereto.”

Accordingly, the Department’s assessment of interest is presumed to be correct, and it is the

taxpayer’s burden to present evidence to show that it is entitled to an abatement. El Centro Villa

Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989).

Section 7-1-67 NMSA 1978 governs the imposition of interest on late payments of tax and

provides, in pertinent part:

A. If a tax imposed is not paid on or before the day on which it becomes
due, interest shall be paid to the state on that amount from the first day
following the day on which the tax becomes due, without regard to any
extension of time or installment agreement, until it is paid... (emphasis
added).

The legislature’s use of the word “shall” indicates that the assessment of interest is mandatory rather

than discretionary. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977). The legislature has directed the

Department to assess interest whenever taxes are not timely paid and has provided no exceptions to the

mandate of the statute. The legislature has further specified that an extension of time to file or pay

taxes does not excuse the taxpayer from the payment of interest. See also, Section 7-1-13(E) NMSA

1978, which gives the Secretary of the Department authority to extend filing and payment due dates,

but states that “no extension shall prevent the accrual of interest as otherwise provided by law.”

When the Department determines that a taxpayer has been negligent or fraudulent in failing

to pay taxes due to New Mexico, Section 7-1-69 NMSA 1978 directs the imposition of a 10%

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negligence penalty or a 50% fraud penalty. In contrast, the imposition of interest pursuant to Section

7-1-67 NMSA 1978 is not a penalty designed to punish taxpayers, but is a means of compensating

the state for the time value of unpaid revenues. In this case, the Van Tubergen estate failed to pay its

estate taxes in a timely manner. Because Ms. Benny-Dell had valid reasons for this failure, no

penalty was assessed under Section 7-1-69 NMSA 1978. The fact remains, however, that the state

was denied the use of funds to which it was legally entitled during the six-month period between

June 15, 2000 and December 15, 2000. In effect, the state made an involuntary loan of funds to the

taxpayer—a loan on which interest was statutorily imposed at the rate of 1.25% per month.

Ms. Benny-Dell argues that the estate should be excused from the payment of interest

because the Department failed to properly advise her accountant concerning the requirements for

filing a New Mexico estate tax return. The evidence does not support this contention. According to

Ms. Benny-Dell, her accountant first talked to Katy, an employee in the Department’s estate tax unit,

on March 24, 2000. During this conversation, the accountant explained the estate’s problem with the

by-pass trust and told Katy that he did not know whether the estate would have a tax liability or

needed to file an estate tax return. Katy told the accountant that if the matter were not resolved by

the due date of the estate tax return, he should request an extension of time to file the return. This

was the correct advice to give the taxpayer. By following Katy’s advice and obtaining a six-month

extension from the IRS, the estate avoided payment of the $2,228.42 late-filing penalty that would

have been assessed against the estate if it had filed its return without a filing extension.

The accountant’s next contact with the Department was on April 2, 2000, when he left a

telephone message for Katy asking for a copy of the instructions for filing a New Mexico estate tax

return. Eleven days later, on April 13, 2000, the accountant received a copy of New Mexico’s Estate

Tax Report, Form 41058. This form is a public record of the Department, and I take administrative

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notice that the form consists of two sides: the estate tax return itself is printed on the front of the

form and the instructions for completing the return are printed on the back of the form. The first

sentence of the instructions states: “A tax in an amount equal to the federal credit is imposed on the

transfer of the net estate of every resident.” The instructions also warn taxpayers that interest at the

rate of 1.25% per month will be due on any payment of estate tax made after the original due date

and that “an extension of time, federal or state, does not waive the accumulation of interest.”

On June 8 and 9, 2000, the accountant called the Department to ask some additional

questions, but was unable to reach anyone who could help him. Ms. Benny-Dell maintains that

because no one was available to answer the accountant’s questions on June 8th and 9th , the estate

was unable to file a timely estate tax return. When she was asked to explain what information the

accountant needed that was not contained in the Department’s instructions, Ms. Benny-Dell was

unable to answer the question. She said that she never called or spoke to anyone in the Department

herself and was relying solely on notes “e-mailed” to her by her accountant. Ms. Benny-Dell

acknowledged that she does not understand estate tax matters and does not know why the accountant

was unable to complete the New Mexico estate tax form he received from the Department in mid-

April 2000.

On June 14, 2000, the day before the estate tax return was due, the accountant talked with

Katy in the Department’s estate tax unit. The accountant subsequently told Ms. Benny-Dell that he

“talked with Katy about filing and about the screw-up the lawyers made with the now-deceased

husband’s estate accounting and how we were lost as to our requirements to even file a return.” Katy

responded by advising the accountant to retain a New Mexico attorney to help him figure out the

estate’s tax liability. This was a reasonable response. It was clearly unreasonable for Ms. Benny-

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Dell and her accountant to expect an employee of the Department to resolve complex legal issues of

trust and probate law and advise the estate as to whether it was required to file an estate tax return.

New Mexico has a self-reporting tax system, and it is the obligation of taxpayers, who have the

most accurate and direct knowledge of their activities, to determine their tax liabilities and accurately

report those liabilities to the state. See, Section 7-1-13(B) NMSA 1978; Tiffany Construction Co. v.

Bureau of Revenue, 90 N.M. 16, 17, 558 P.2d 1155, 1156 (Ct. App. 1976), cert. denied, 90 N.M. 255,

561 P.2d 1348 (1977). If a taxpayer does not have adequate knowledge or information to complete his

tax returns, he has an obligation to consult with a qualified accountant or attorney. Ms. Benny-Dell’s

testimony that she could not obtain the services of a New Mexico attorney because her Maryland

attorney did not know anyone in New Mexico is unconvincing. There are many sources to obtain

information concerning New Mexico attorneys. As just one example, the State Bar of New Mexico

maintains a list of attorneys who have qualified as specialists in specified areas of practice, including

estate planning, probate and trusts. This information can be obtained by calling the State Bar on the

telephone or by accessing the State Bar’s web site on the internet.

Finally, Ms. Benny-Dell maintains that the Department misled her into believing she could

obtain a waiver of the interest assessed against the estate. Again, the evidence does not support this

contention. Ms. Benny-Dell’s accountant told her that someone at the Department told him that the

estate could write a letter requesting a waiver of the interest and that such requests were reviewed

“on a case-by-case basis.” Ms. Benny-Dell testified that she and her accountant “assumed” the

interest would be waived because there were extenuating circumstances to explain the estate’s late

payment of estate tax. A taxpayer’s assumption does not equate to a promise by the Department.

Given the clear language in the Department’s instructions that interest is due on payments of estate tax

made after the original due date and that an extension of time to file does not waive the accumulation

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of interest, it is difficult to understand why Ms. Benny-Dell believed that interest would be waived in

this case.

After reviewing the evidence presented, there is no basis to find that the Department was

responsible for the estate’s late payment of estate tax or that the Department promised Ms. Benny-

Dell a waiver of the interest assessed as a result of the late payment. Section 7-1-67 NMSA 1978

requires interest to be paid whenever the state is denied the use of tax revenue to which it is legally

entitled. Accordingly, interest was properly assessed against the estate for the six-month period from

June 15, 2000, the date the estate tax was originally due, until December 15, 2000, the date payment

was made.

CONCLUSIONS OF LAW

1. The Estate of Inez S. Van Tubergen filed a timely, written protest to Assessment No.

21390, and jurisdiction lies over the parties and the subject matter of this protest.

2. The Van Tubergen Estate was late in paying estate taxes due to the state, and interest

was properly assessed pursuant to Section 7-1-67 NMSA 1978.

3. The Department was not responsible for the Estate’s failure to pay estate taxes on time

and is not estopped from assessing or collecting interest due on the late payment.

For the foregoing reasons, the taxpayer's protest IS DENIED.

DATED June 17, 2002.

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