Did a taxpayer owe interest when she correctly filed and paid her New Mexico income tax, but the Department mistakenly sent an unsolicited refund and later assessed it back?

Plain-English summary

Mary Ann Mendonca did not owe $80.44 of interest on a tax deficiency created entirely by the Department's unauthorized, unsolicited refund. The Department could recover the $165 principal paid contrary to law, but the statutory definition of tax contained a context clause that allowed interest relief in these unusual circumstances.

Mendonca timely filed her 1999 New Mexico personal income tax return showing $61.00 due and included a check for that amount.

Because she used federal Form 1040EZ, her standard deduction and exemption appeared as one combined amount on the federal return. She followed the New Mexico instructions by entering that combined amount on the state return's deduction line and leaving the separate exemption line blank.

The Department mistakenly concluded that she had omitted an exemption. Without contacting her, it added a $2,750 exemption, recalculated the return, and sent an unsolicited $167.50 refund check in April 2000 without explaining the adjustment.

At the time, the Department had no authority to initiate a refund claim. Its own regulation said the affected taxpayer had to start the claim.

The erroneous refund could be assessed as tax

The Department discovered the duplicate exemption in 2003 after receiving federal information. It assessed $165.00 of tax principal, $82.61 of interest, and $16.50 of penalty.

Mendonca paid the principal and protested the interest and penalty. The Department later abated the penalty and reduced interest to $80.44.

Section 7-1-3(V) broadly defined “tax” to include a refund paid by the Department contrary to law. The decision held that this included the unauthorized payment here; otherwise, the Department's authority to assess tax would not reach its own erroneous refunds.

The $165 principal was therefore properly recoverable.

Context made interest inappropriate

Section 7-1-3(V) also said related interest and penalty were included unless the context required otherwise. The decision treated that clause as meaningful.

Ordinarily, interest follows an erroneous refund requested by a taxpayer because the taxpayer initiated the claim and represented entitlement to the money. Mendonca did neither. She filed correctly, paid what was due, and never requested a refund.

The Department alone recalculated the return incorrectly and sent money without statutory authority. The decision reasoned that the Legislature's broader interest rules placed consequences on the party responsible for the underpayment or delayed refund in several contexts.

Although Section 7-1-67 had no express exception for this exact scenario, the Legislature would not be expected to anticipate the Department acting outside its authority. The context clause supplied the basis to relieve Mendonca of interest.

Result: protest GRANTED. The Department was ordered to abate $80.44 of interest.

What this means for you

Taxpayers receiving an unexpected refund

Do not assume the payment is correct. Compare it with the filed return and ask the Department for the calculation, especially when no refund was requested.

Taxpayers repaying an agency error

Principal and interest can be treated differently. This decision allowed recovery of the erroneous payment as tax while denying interest because the Department alone caused the deficiency.

Taxpayers who filed and paid correctly

Preserve the filed return, payment proof, instructions, and agency correspondence. Those facts were central to showing that Mendonca did not initiate or contribute to the erroneous refund.

Refund disputes involving unusual facts

Read statutory definitions in full. The outcome here turned on the phrase “unless the context requires otherwise,” not simply the general interest rule.

Common questions

Q: Did Mendonca make an error on her return?
A: No. The stipulated facts said she followed the instructions and completed the state return correctly.

Q: Why did the Department send money?
A: It mistakenly added a duplicate federal exemption and generated an unsolicited refund.

Q: Could the Department recover the principal?
A: Yes. The $165 deficiency created by the contrary-to-law refund qualified as tax.

Q: Why was interest abated?
A: Mendonca had not requested the refund and did not cause the deficiency; the Department's unauthorized act did.

Q: How much interest was removed?
A: $80.44.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-3(V) — tax includes refunds paid contrary to law unless context requires otherwise
• NMSA 1978, § 7-1-13 — taxpayer self-reporting duty
• NMSA 1978, § 7-1-17 — Department authority to assess tax
• NMSA 1978, § 7-1-26 — taxpayer-initiated refund claims
• NMSA 1978, § 7-1-67 — interest on underpayments and statutory suspensions
• NMSA 1978, § 7-1-68 — interest on tax overpayments
• Regulation 3.1.9.8 NMAC — Department cannot initiate a refund claim
• Regulation 3.1.10.18(C) NMAC — interest on repayment of excess refunds

Cases cited:

• Singleton v. United States, 128 F.3d 833 (4th Cir. 1997)
• O’Bryant v. United States, 49 F.3d 340 (7th Cir. 1995)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)
• State v. Long, 121 N.M. 333, 911 P.2d 227 (Ct. App. 1995)
• Roth v. Thompson, 113 N.M. 331, 825 P.2d 1241 (1992)
• Whitely v. New Mexico State Personnel Board, 115 N.M. 308, 850 P.2d 1011 (1993)
• State ex rel. Reynolds v. Aamodt, 111 N.M. 4, 800 P.2d 1061 (1990)
• Dona Ana Savings & Loan Association, F.A. v. Dofflemeyer, 115 N.M. 590, 855 P.2d 1054 (1993)
• State v. Sheets, 94 N.M. 356, 610 P.2d 760 (Ct. App. 1980)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976)
• Teco Investments v. Taxation and Revenue Department, 125 N.M. 103, 957 P.2d 532 (Ct. App. 1998)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mary Ann Mendonca
• Decision PDF: D&O 05-01

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
MARY ANN MENDONCA No. 05-01
ASSESSMENT OF INTEREST ISSUED
UNDER LETTER ID NO. L0932663296

DECISION AND ORDER

This matter came before Margaret B. Alcock, Hearing Officer, on a Statement of Stipulated

Facts and Joint Memorandum filed by the parties, who asked that the above-referenced protest be

decided based on the parties’ written submission and without a hearing. The Taxation and Revenue

Department (“Department”) was represented by Peter Breen, Special Assistant Attorney General. Mary

Ann Mendonca (“Taxpayer”) represented herself. Based on the facts and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a New Mexico resident who filed a timely 1999 New Mexico

personal income tax return (“PIT-1”) showing tax due in the amount of $61.00.

2. The Taxpayer included a check for $61.00 with her return.

3. Because the Taxpayer filed federal Form 1040EZ to report her 1999 income to the

federal government, her federal standard deduction and exemption were combined as a single

amount on Line 5 of her federal return.

4. The instructions to the 1999 New Mexico PIT-1 directed taxpayers who filed Form

1040EZ to report their combined federal deduction and exemption on Line 7 of the PIT-1 (federal

standard or itemized deduction amount) and leave Line 8 of the PIT-1 (federal exemption amount)

blank.

5. The Taxpayer followed the Department’s instructions and correctly completed her

1999 New Mexico PIT-1.

6. In reviewing the Taxpayer’s return, the Department incorrectly concluded that the

Taxpayer had not taken the federal exemption to which she was entitled.

7. Even though the New Mexico PIT-1 requires taxpayers to include their address and

telephone number on their return, the Department never contacted the Taxpayer in this case to ask

why she had not claimed the federal exemption on Line 8 of the PIT-1 or notify her that she might

have overreported her tax liability.

8. Instead of contacting the Taxpayer, the Department acted on its own initiative to

erroneously credit her with an additional federal exemption in the amount of $2,750.00 and

recalculate her New Mexico income tax liability.

9. On April 10, 2000, the Department notified the Taxpayer that she had overpaid her

1999 New Mexico income tax and sent her an unsolicited refund check in the amount of $167.50.

The Department did not provide any explanation for the adjustment.

10. At the time the check was sent to the Taxpayer, the Department was not authorized to

make unsolicited refunds. The Department’s action was also directly contrary to Department

Regulation 3 NMAC 1.9.8 (now codified as 3.1.9.8 NMAC) to NMSA 1978, § 7-1-26, which states

that the Secretary of the Department “has not been given statutory authority to initiate” a refund and

that “[t]he person affected must initiate the claim for refund.”

11. In 2003, the Department received information from the Internal Revenue Service that

led the Department to discover the duplicate exemption amount credited to the Taxpayer on her 1999

New Mexico income tax return.

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12. On August 21, 2003, the Department issued an assessment under Letter ID No.

L0932663296, assessing the Taxpayer for $165.00 of 1999 personal income tax, which was the

deficiency created by the Department’s unauthorized refund to the Taxpayer, plus $82.61 of interest

and $16.50 of penalty.

13. On August 29, 2003, the Taxpayer paid the tax principal assessed.

14. On September 10, 2003, the Taxpayer filed a written protest to the assessment of

interest and penalty.

15. The Department subsequently abated the penalty and recalculated the amount of

interest assessed, reducing the interest to $80.44.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for the $80.44 of interest assessed on

the $165.00 tax deficiency created by the Department’s unauthorized return of a portion of the

Taxpayer’s 1999 personal income tax. The Taxpayer argues that she should not be liable for interest

because the $165.00 check she received from the Department does not meet the definition of a refund

under the Tax Administration Act, but was an unauthorized payment made on the Department’s own

initiative. It is the Department’s position that interest is due on all underpayments of tax, without

regard to the circumstances that led to the underpayment.

Applicable Law. NMSA 1978, § 7-1-67 governs the imposition of interest and provides, in

pertinent part:

A. If any tax imposed is not paid on or before the day on which it becomes
due, interest shall be paid to the state on such 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....

Although the language of the statute appears to limit the imposition of interest to situations where a

tax is not paid by the statutory due date, the definition of “tax” in NMSA 1978, § 7-1-3 indicates that

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interest is also due on tax deficiencies created by erroneous refunds. Section 7-1-3(V)1 provides that

the term “tax” includes:

any amount of any abatement of tax made or any credit, rebate or refund paid or
credited by the department under any law subject to administration and
enforcement under the provisions of the Tax Administration Act to any person
contrary to law and includes, unless the context requires otherwise, the amount of
any interest or civil penalty relating thereto.

In reliance on this definition, the Department has adopted Regulation 3.1.10.18 NMAC, which

addresses the issue of “excess” refunds as follows:

C. When interest applies to repayments of excess refunds.

(1) “Tax” as defined by the Tax Administration Act, includes any amount
of any credit, rebate or refund paid by the department contrary to any law subject
to administration under the Tax Administration Act. An excess credit, rebate or
refund paid is a tax owed to the state. When no due date is specified by statute,
the due date of such a tax is 30 days after the excess credit, rebate or refund is
received by the taxpayer. Interest shall be applied for each month or fraction
thereof from the due date until the excess credit, rebate or refund is paid.

(2) Unless the preponderance of evidence indicates another date, the
person to whom the department mails an excess credit, rebate or refund shall be
presumed to have received the excess credit, rebate or refund seven days after the
department mailing.

(3) Subsection C of Section 3.1.10.18 NMAC applies to any excess credit,
rebate or refund paid by the department after January 1, 1994.

The Department’s Unsolicited Refund Comes Within the Definition of “Tax.” The first

issue to be addressed is whether the Department’s unsolicited payment to the Taxpayer can be

characterized as a refund that comes within the definition of “tax” set out in NMSA 1978, § 7-1-

3(V). The Taxpayer argues that the payment could not have been a refund because the Department

did not have jurisdiction to make refunds. In support of her argument, the Taxpayer references two

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At the time the Department made its erroneous payment to the Taxpayer in April 2000, this subsection
was designated as § 7-1-3(U). Because no changes have been made to the text of the subsection, it will
be referred to in this decision by its current designation of § 7-1-3(V).

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federal tax cases discussing the procedures applicable to different types of refunds made by the

Internal Revenue Service. See, Singleton v. United States, 128 F.3d 833 (4th Cir. 1997); O’Bryant v.

United States, 49 F.3d 340 (7th Cir. 1995). In contrast to federal law, however, New Mexico law

does not recognize the distinction between “rebate” and “non-rebate” refunds discussed in the

federal cases. For this reason, these cases are not applicable to the issues raised here. See, El Centro

Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 797, 779 P.2d 982, 984 (Ct.

App. 1989) (federal negligence standard held inapplicable because it is inconsistent with state law);

State v. Long, 121 NM 333, 911 P.2d 227 (Ct. App.), cert. denied, 121 N.M. 119, 908 P.2d 1387

(1995) (in tax cases, New Mexico courts follow federal law only to the extent they find that law

persuasive).

In order to determine whether the Department’s erroneous payment comes within the

definition of “tax”, it is necessary to examine the language of § 7-1-3(V) itself. The chief aim of

statutory construction is to give effect to the intent of the legislature. Roth v. Thompson, 113 N.M.

331, 332, 825 P.2d 1241, 1242 (1992). The plain language of the statute is the primary indicator of

legislative intent. Whitely v. New Mexico State Personnel Board, 115 N.M. 308, 311, 850 P.2d

1011, 1014 (1993). The words of a statute, including terms not statutorily defined, should be given

their ordinary meaning absent clear and express legislative intention to the contrary. State ex rel.

Reynolds v. Aamodt, 111 N.M. 4, 5, 800 P.2d 1061, 1062 (1990).

The language of § 7-1-3(V) is quite broad, and defines the term “tax” to include any “rebate

or refund paid or credited by the department…to any person contrary to law….” Giving the phrase

“contrary to law” its ordinary meaning, it certainly appears to cover the Department’s unauthorized

payment to the Taxpayer in this case. As the Department points out, to hold otherwise would

foreclose the state from recovering such payments since the Department’s authority to assess

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taxpayers is limited to assessments of “tax.” See, NMSA 1978, § 7-1-17. The interpretation of a

statute must be consistent with legislative intent and must not render a statute's application absurd,

unreasonable, or unjust. Dona Ana Savings & Loan Association, F.A. v. Dofflemeyer, 115 N.M. 590,

592, 855 P.2d 1054, 1056 (1993). The purpose of defining the term “tax” to include abatements,

credits, rebates and refunds that are made “contrary to law” is to insure that the Department will be

able to recover the erroneous payments once they are discovered. With that in mind, it is apparent

that the unauthorized refund at issue in this case created a tax liability subject to assessment by the

Department.

Interest Does Not Apply in the Context of this Case. Having determined that the deficiency

created by the Department’s erroneous refund was a “tax” subject to assessment, the next issue to be

addressed is whether the Taxpayer is liable for interest on the deficiency. The only legal argument

provided by the parties is the Department’s assertion that “it is undisputed that the assessment of

interest on ‘tax’ is not discretionary.” Joint Memorandum at 4. This statement does not adequately

address the unusual circumstances of this case. Nor does the Department’s argument address the

“context” clause contained in § 7-1-3(V) which states that the term “tax” means:

any amount of any…refund paid or credited by the department…contrary to law
and includes, unless the context requires otherwise, the amount of any interest
or civil penalty relating thereto. (emphasis added)

The existence of a context clause cannot be ignored. This is illustrated by the New Mexico Court of

Appeals’ decision in State v. Sheets, 94 N.M. 356, 610 P.2d 760 (Ct. App.), cert. denied, 94 N.M.

675, 615 P.2d 992 (1980), which upheld the defendant’s conviction for selling unregistered notes.

One of the issues in the case concerned the meaning of the term “security.” Although the definitions

of “security” in federal and state law were virtually identical, the court rejected the defendant’s

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reliance on a law review article interpreting federal securities statutes, noting that the federal statutes

contained a context clause while the state statute did not:

Both federal statutes define "security" similarly to the New Mexico definition
"unless the context otherwise requires". See 15 U.S.C. §§ 77b and 78c, supra.
The New Mexico statute, § 58-13-2(H), supra, does not contain the "context"
clause. Because of this statutory difference, the Nebraska Law Review article
does not support defendant's contention that "security" in our statute excludes
commercial notes.

94 N.M. 356, 361, 610 P.2d 760, 765. Six years after the Sheets decision, the New Mexico

Legislature enacted the New Mexico Securities Act of 1986. In the new act, the definition of a

“security” is now prefaced with a context clause. See NMSA 1978, § 58-13B-2.

In this case, the use of a context clause in § 7-1-3(V) indicates that there may be

circumstances in which the assessment of a tax deficiency created by an erroneous refund should not

include interest. Under the Tax Administration Act, the imposition of interest is not based solely on

which party had the use of the funds at issue, but also on which party was responsible for the tax

liability or overpayment. Pursuant to NMSA 1978, § 7-1-67, taxpayers are generally liable for

interest on underpayments of tax because New Mexico has a self-reporting tax system, and the

obligation is on taxpayers to report and pay their taxes by the statutory due date. NMSA 1978, § 7-1-

13; 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). For the same reason, NMSA 1978, § 7-1-68

generally does not require the Department to pay interest on overpayments of tax which result from

taxpayers’ reporting errors. Teco Investments v. Taxation and Revenue Department, 125 N.M. 103,

109, 957 P.2d 532, 538 (Ct. App. 1998) (under NMSA 1978, Section 7-1-68(C), (D) (1994), interest

is not paid on an overpayment caused by taxpayer error).

The legislature has enacted a number of exceptions to the general rules governing interest,

however, when the Department fails to fulfill its statutory responsibilities to the taxpayer. For example,

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Subsections (A)(6) and (A)(7) of § 7-1-67 provide for the suspension of interest on underpayments of

tax when the Department fails to issue a timely assessment or fails to provide taxpayers with required

notices. Subsections (C) and (D) of § 7-1-68 require the Department to pay interest on overpayments of

tax when the Department fails to grant a taxpayer’s refund claim within the time periods specified in

the statute. In those cases, interest on overpayments resulting from the taxpayer’s self-assessment is

calculated from the date the claim for refund was filed; interest on overpayments resulting from an

assessment issued by the Department is calculated from the date the taxpayer paid the assessment.

When a taxpayer files a claim for refund that later turns out to be erroneous, the general rule of

§ 7-1-67 applies because the taxpayer was the party who initiated the claim and represented that he was

entitled to the refund. There is no inequity in holding the taxpayer responsible for interest on the

deficiency created by his erroneous claim. That rationale does not apply here, however, where the

Taxpayer never filed a claim for refund. To the contrary, the Taxpayer filed a return showing tax due

and included a check to cover her liability. It was the Department that incorrectly determined the

Taxpayer was entitled to a refund and then initiated the refund without statutory authority. Based on

the legislature’s overall approach to the imposition of interest, the Taxpayer should not be required to

pay interest on the tax deficiency created by the Department’s ultra vires act. The fact that § 7-1-67

does not contain a specific exception covering this scenario is not significant since the legislature would

not expect the Department to act outside its jurisdiction. Given the unusual circumstances of this case,

the context clause in § 7-1-3(V) provides the necessary authority for relieving the Taxpayer of liability

for payment of interest.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to the assessment of interest made under

Letter ID No. L0932663296, and jurisdiction lies over the parties and the subject matter of this protest.

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2. The Department’s unauthorized refund to the Taxpayer created a tax liability that was

properly assessed against the Taxpayer when the Department discovered its error.

3. The Taxpayer is not liable for interest on the tax deficiency created by the

Department’s unauthorized refund.

For the foregoing reasons, the Taxpayer's protest IS GRANTED, and the Department is ordered

to abate the $80.44 of interest assessed against the Taxpayer.

DATED January 6, 2005.

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