Could DePuy recover a $79,241 New Mexico corporate income tax refund after receiving retroactive permission to use separate-entity filing but submitting its amended 1999 return after the refund deadline?

Plain-English summary

DePuy, Inc. & Subsidiaries could use the Department's retroactive permission to change corporate filing methods only for tax years still open under the refund statute. Its amended 1999 returns claimed $79,241 after the limitations period expired, so the refund was denied.

DePuy had filed New Mexico corporate income tax returns on a unitary domestic combined basis through 1998. Johnson & Johnson acquired it in November 1998, but DePuy did not ask how its new parent filed in New Mexico or request a change before filing its original 1999 return.

On September 13, 2000, DePuy filed that return using combined reporting and claimed a refund of approximately $80,000. After learning that Johnson & Johnson used separate-entity filing, DePuy filed amended 1999 returns in September 2001, with one entity showing a $79,241 refund.

DePuy did not formally request permission to change filing status until August 2002. After a lengthy delay and repeated contacts, the Department wrote in February 2004 that DePuy could file as separate corporate entities beginning with 1999. It accepted resubmitted 2000 and 2001 returns but told DePuy that 1999 had to go through the protest process.

The Department could not disavow its retroactive permission selectively

Section 7-2A-8.3(B) required prior permission before corporations that had used combined reporting could file individually. Regulation 3.4.10.8 said a different reporting method could not be elected retroactively and imposed a filing-deadline cutoff.

In practice, however, the Department had interpreted the statute more liberally: once permission was granted, a taxpayer could amend an earlier return if that year's limitations period remained open.

The Department gave DePuy written permission beginning with 1999 and honored it for 2000 and 2001. The decision rejected the Department's attempt to treat the same permission as invalid for 1999 merely because it conflicted with the regulation. Any conflict between two reasonable agency constructions had to be resolved for the taxpayer.

That did not automatically make the 1999 refund timely.

The amended 1999 refund claim missed the three-year deadline

Section 7-1-26(D) generally required a refund claim within three years after the end of the calendar year in which the payment was originally due.

DePuy's 1999 corporate income tax payment was originally due March 15, 2000. The decision calculated that the refund period ended December 31, 2003.

DePuy resubmitted its amended 1999 returns on March 8, 2004. Because that was after the deadline, the $79,241 refund shown on those returns was barred.

The Department's delay in deciding the filing-method request did not extend the deadline. The governing filing-method statute neither guaranteed approval nor imposed a time limit for the Department to act. The decision also found that DePuy contributed to the delay by waiting to investigate and formally request the change.

The original refund claim was not preserved

DePuy's original September 2000 return also showed a refund, but the Department neither granted nor denied it.

Under Section 7-1-26(B)(2), after 120 days of inaction DePuy had 90 days to pursue one remedy: a protest or a district-court suit. It did neither. Once 210 days had passed, the Department and the hearing officer lacked jurisdiction to consider that original claim.

Result: protest DENIED. The retroactive filing permission was recognized for open years, but the 1999 refund remained unavailable.

What this means for you

Corporate groups changing New Mexico filing methods

Obtain the required permission early and in writing. A change in ownership did not itself establish that DePuy's prior reporting election ended.

Taxpayers awaiting agency action

Do not assume an unanswered request preserves a refund indefinitely. This decision placed responsibility on the taxpayer to use the statutory remedy after the Department's inaction period.

Businesses approaching a refund deadline

Track the refund limitation separately from any pending request about filing method or other preliminary issue. Approval of the underlying method did not revive an expired claim.

Taxpayers receiving retroactive agency permission

Read the permission together with every applicable limitations period. Here, retroactive approval helped only for years that were still open.

Common questions

Q: Did the decision recognize the Department's permission to use separate-entity filing beginning in 1999?
A: Yes, but only for years still within the refund limitations period.

Q: Why was the $79,241 refund denied?
A: The amended 1999 returns were resubmitted on March 8, 2004, after the December 31, 2003 deadline calculated in the decision.

Q: Did the Department's delay extend the refund deadline?
A: No. The filing-method statute set no agency decision deadline and did not guarantee approval.

Q: What happened to the refund claimed on the original 1999 return?
A: DePuy did not protest or sue within the statutory window after Department inaction, so the claim was not preserved for review.

Q: Were the amended 2000 and 2001 returns accepted?
A: Yes. The Department accepted those returns on a separate-entity basis.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-26(B)(2) — remedies after Department inaction on a refund claim
• NMSA 1978, § 7-1-26(D) — three-year refund-claim limitation
• NMSA 1978, § 7-2A-8.3(B) — permission to change from combined to individual filing
• NMSA 1978, § 7-2A-8.4 — consolidated filing election
• Regulation 3.4.10.8 NMAC — deadline for changing corporate reporting method

Case cited:

• Kilmer v. Goodwin, 2004-NMCA-122, 99 P.3d 690

Source

• Listing: New Mexico Decisions & Orders
• Decision post: DePuy, Inc. & Subsidiaries
• Decision PDF: D&O 05-10

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 No. 05-10
DePUY, INC. & SUBSIDIARIES; ID NO. 02-182224-00 7
TO 5/24/02 DENIAL OF CLAIM FOR REFUND
OF 1999 CORPORATE INCOME TAX

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on May 4, 2005, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("Department")

was represented by Bruce J. Fort, Special Assistant Attorney General. DePuy, Inc. & Subsidiaries

(“DePuy”) was represented by Lois Hoelle, Senior Tax Accountant, and Monte Moore, Tax

Director. Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED

AS FOLLOWS:

FINDINGS OF FACT

1. For tax years up through 1998, DePuy filed corporate income tax returns with

New Mexico on a unitary domestic combined basis.

2. On November 4, 1998, DePuy was acquired by Johnson & Johnson.

3. Johnson & Johnson and its subsidiaries filed their New Mexico corporate income

tax returns on a separate entity basis.

4. DePuy did not check with Johnson & Johnson to determine how it reported its

New Mexico income, nor did DePuy request a change in its reporting method before filing its

1999 New Mexico corporate income tax return.

5. On September 13, 2000, DePuy filed an original 1999 corporate income tax return

on a unitary domestic combined basis, requesting a refund of approximately $80,000.

6. In October 2000, the Department asked DePuy to provide certain information

from the company’s consolidated federal return.

7. After receiving the Department’s letter, DePuy contacted Johnson & Johnson and

learned that Johnson & Johnson filed with New Mexico on a separate entity basis. Johnson &

Johnson told DePuy that it should also be filing on a separate entity basis.

8. Following this conversation with Johnson & Johnson in October 2000, DePuy

made some unsuccessful attempts to contact the Department by telephone, but did not submit a

written request for a change in filing status.

9. As of January 11, 2001, which was the 120th day following the day that DePuy

filed its original 1999 corporate income tax return, the Department had taken no action on the

claim for refund shown on that return.

10. As of April 12, 2001, which was the 210th day following the day that DePuy filed

its 1999 corporate income tax return, the Department still had not acted on DePuy’s claim for

refund, nor had DePuy filed a protest to the Department’s inaction.

11. On September 6, 2001, DePuy filed amended returns for the 1999 tax year,

reporting its income on a separate entity basis. The return filed for one of the separate entities

showed a refund due of $79,241.

12. With its amended returns, DePuy included a letter explaining that it was changing

its filing method because it had been acquired in late 1998 by Johnson and Johnson, Inc., and

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asserting that its prior election to file using the combined reporting method had been terminated

upon its acquisition by Johnson & Johnson.

13. In its September 6, 2001 cover letter, DePuy also requested that the estimated

payments made for 1999 be reallocated to the separate entity returns.

14. Because the Department did not accept DePuy’s amended 1999 returns, the

estimated payments reported on DePuy’s original return were not reallocated to the separate

entities. As a result, assessments for additional tax were generated for later tax years.

15. On February 1, 2002, DePuy sent the Department a letter explaining that the

assessments resulted from a problem with the allocation of estimated payments and stating: “We

need New Mexico to recognize the filing change from combined to separate entity and reallocate

the payments made by DePuy, Inc. to the separate entities.”

16. DePuy’s February 1, 2002 letter did not protest, or even mention, the

Department’s failure to act on the refund claimed on DePuy’s 1999 amended returns.

17. On August 7, 2002, after several telephone conversations with Department

employees, DePuy sent a letter formally requesting permission to change its filing status from

unitary domestic combined to separate entity commencing with the 1999 tax year.

18. DePuy did not receive any response to its request for a change in filing status until

March 2003, when Richard Anklam, the Department’s Director of Tax Policy, told DePuy he

would send out a letter granting its request for a change in filing status.

19. In October 2003, Mr. Anklam again told DePuy that he had approved their change

in filing status and would send a confirming letter. DePuy never received the promised letter.

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20. In December 2003, DePuy sent a letter directly to Secretary Jan Goodwin

requesting formal approval of the change in DePuy’s filing status.

21. On February 18, 2004, Lillian Trujillo, a supervisor in the Department’s

Corporate Income Tax Unit, sent DePuy a letter stating:

Your request has been reviewed by Mr. Richard Anklam of the
Secretary’s office.

You have been granted permission to file as Separate Corporate Entity
beginning with the 1999 tax year and forward.

We apologize for the delay in granting this permission Please re-submit
the 2000 and 2001 corporate returns that are affected by this decision.

22. DePuy resubmitted its corporate income tax returns for 2000 and 2001 reporting

its income on a separate entity basis, and these returns were accepted by the Department.

23. Ms. Trujillo’s February 18, 2004 letter limited resubmission of DePuy’s corporate

income tax returns to the 2000 and 2001 tax years; in a telephone conversation of the same date,

she informed DePuy that it would have to go through the protest process to refile its 1999

returns.

24. On March 8, 2004, DePuy resubmitted its amended 1999 corporate income tax

returns showing a refund due in the amount of $79,241 and also submitted Form ACD-31094,

Formal Protest, stating that it was protesting the delay in the Department’s approval of DePuy’s

change in filing status because “[n]ow that we have permission to change our filing status, the

1999 tax year is outside the statute of limitations.”

25. The Department subsequently notified DePuy that the Secretary’s delay in

approving a change in filing status was not a protestable action.

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26. On May 24, 2004, the Department sent DePuy a letter stating that that its refund

of 1999 corporate income tax was denied because the Taxpayer’s amended returns were

resubmitted after expiration of the three-year limitations period set out in NMSA 1978, § 7-1-26.

27. On June 22, 2004, the Taxpayer filed a written protest to the Department’s May

24, 2004 denial of its claim for refund.

DISCUSSION

There are two issues to be decided in this protest: whether the Department is required to

honor its retroactive permission for DePuy to file its 1999 corporate income tax returns on a

separate entity basis, and whether the Department properly denied the $79,241 refund shown on

those returns. DePuy argues that: (1) the Department is bound by the oral and written statements of

its employees granting DePuy permission to change its filing status retroactive to the 1999 tax year;

and (2) the Department should not be allowed to keep money to which it is not entitled. The

Department responds that: (1) NMSA 1978, § 7-2A-8.3(B) and Regulation 3.4.10.8 prohibit

retroactive approval of changes in filing status; and (2) the refund requested in the 1999 returns

DePuy filed in March 2004 is barred by the limitations period set out in NMSA 1978, § 7-1-26.

Retroactive Permission for Change in Filing Status. Section 7-2A-8.3(B) of the

Corporate Income and Franchise Act states as follows:

B. Once corporations have reported net income through a combined return for
any taxable year, they shall file combined returns for subsequent taxable years, so
long as they remain unitary corporations, unless the corporations elect to file
pursuant to Section 7-2A-8.4 NMSA 1978 [providing for filing on a consolidated
basis] or unless the secretary grants prior permission for one or more of the
corporations to file individually. (emphasis added).

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The issue in dispute is the meaning of the words “prior permission.” There are at least two ways in

which these words can be interpreted. The first is set out in Subsection E of Regulation 3.4.10.8

NMAC, which states:

No retroactive election of a different method for reporting New Mexico state
income tax will be permitted. An election to report under a higher-ranked method
or a request for permission to file under a lower-ranked method must be made no
later than the last day on which the corporate income tax return may be timely filed
for the taxpayer’s taxable year to which the change in method applies.

In this case, DePuy’s 1999 corporate income tax return was due on or before September 15, 2000

(pursuant to an extension of time to file). Based on the Department’s regulation, DePuy was

required to obtain permission to change to single entity filing prior to this date. Although DePuy

maintained that its prior election to file on a combined basis terminated upon its acquisition by

Johnson & Johnson, it did not cite any legal authority to support its position. In addition, it

should be noted that DePuy filed its original 1999 corporate income tax return on September 13,

2000, almost two years after DePuy’s acquisition by Johnson & Johnson. Therefore, even if

DePuy’s prior election to file on a combined basis terminated at the time of the acquisition,

DePuy made a new election when it filed its 1999 post-acquisition corporate income tax return

on the same basis.

The Department argues that these facts are dispositive, and that Lillian Trujillo’s

February 2004 letter granting DePuy’s request for a filing change retroactive to the 1999 tax year

was ultra vires and of no effect. The problem with this argument is that while Ms. Trujillo’s

letter may have been contrary to the Department’s regulation, it was not necessarily contrary to

the statutory requirements of NMSA 1978, § 7-2A-8.3(B). In actual practice, the Department

interpreted Subsection B to mean that once permission to change a filing method was granted, the

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taxpayer could amend a previously filed return using the new method, provided the statute of

limitations for that year was still open. Although this interpretation is different than that set out in

Regulation 3.4.10.8, it is not inherently unreasonable and would not qualify as ultra vires.

In February 2004, the Department gave DePuy written permission to file on a separate entity

basis beginning with the 1999 tax year. The Department subsequently accepted DePuy’s amended

returns reporting its income for 2000 and 2001 on a separate entity basis. The Department’s current

assertion that the hearing officer must invalidate the Department’s retroactive permission for a

change in filing status for 1999, while the Department continues to honor the retroactive permission

granted for the 2000 and 2001 tax years, is clearly untenable. It would be against both logic and

fairness to allow the Department to adopt one construction of a statute by regulation, a different

construction in practice, and then pick and choose which one to apply in a given situation.

Assuming that each construction would qualify as a reasonable interpretation of the statute at issue,

any conflict between the two must be resolved in favor of the taxpayer.

In its dealings with DePuy, the Department chose to ignore the interpretation of “prior

permission” set out in Regulation 3.4.10.8 NMAC in favor of a more liberal construction allowing

amended returns to be filed once permission for a change in filing status has been granted. Having

accepted DePuy’s amended returns for tax years 2000 and 2001, there is no basis for the

Department to reject the amended return for tax year 1999 on the grounds that the Department’s

retroactive permission to change filing methods was invalid. The issue remaining to be determined

is whether the refund requested in DePuy’s amended 1999 return was properly denied because it

was filed beyond the limitations period set out in NMSA 1978, § 7-1-26.

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Statutory Limitation on Granting of Refunds. With some exceptions not applicable

here, NMSA 1978, § 7-1-26(D) limits the time within which a claim for refund may be filed to

three years from the end of the calendar year in which the payment of tax was originally due,

stating:

[N]o credit or refund of any amount may be allowed or made to any person
unless as the result of a claim made by that person as provided in this section:

(1) within three years of the end of the calendar year in which:

(a) the payment was originally due or the overpayment resulted from
an assessment by the department pursuant to Section 7-1-17 NMSA 1978,
whichever is later;

In this case, the original due date for payment of DePuy’s 1999 corporate income taxes was

March 15, 2000. The time within which DePuy could claim a refund of these taxes expired

December 31, 2003. The amended 1999 corporate income tax return DePuy filed on March 8,

2004 showing a refund due of $79,241 was filed beyond the limitation period set out in § 7-1-26

and was not timely. For this reason, the refund was properly denied.

Although DePuy argues that it was entitled to rely on the representations of the

Department’s employees, there is no evidence that any representations were made concerning

DePuy’s right to refile its claim for refund of 1999 taxes. Lillian Trujillo’s February 18, 2004

letter specifically limited resubmission of DePuy’s corporate income tax returns to the 2000 and

2001 tax years. In a telephone conversation, Ms. Trujillo advised DePuy that the statute of

limitations had run on the 1999 tax year and returns for that year could only be accepted through

the protest process. In this case, however, the 18-month delay between DePuy’s request for a

change in filing status and the Department’s letter granting the change does not provide a basis

for waiving the statute of limitations. While NMSA 1978, § 7-2A-8.3 allows a taxpayer to seek

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permission to change its filing status, the statute does not guarantee that permission will be

granted, nor does it set a time limit within which the Department is required to act on such

requests.

An additional consideration is the fact that DePuy bears as much responsibility for the

delay as does the Department. At the time DePuy was acquired by Johnson & Johnson in

November 1998, DePuy failed to inquire as to the filing method Johnson & Johnson used to

report its New Mexico income. As a result, DePuy did not apply for a change in its reporting

method, but elected to file its original 1999 returns on a unitary domestic combined basis. Even

after discovering its error in October 2000, DePuy took no steps to obtain the Department’s

permission to change to separate entity filing. Although Lois Hoelle, DePuy’s senior tax

accountant, testified that she was not initially aware of this requirement, there was no explanation

given for this lack of knowledge. In addition to being set out in New Mexico’s tax statutes and

regulations, the instructions to New Mexico’s corporate income tax returns—including

instructions for the 1999 tax year—clearly advise taxpayers that a corporation wishing to change

to a lower-ranked reporting method “must obtain written permission PRIOR TO the start of the

tax year….” (emphasis in the original).1 By the time DePuy submitted its written request for a

change in filing status in August 2002, more than three-and-a-half years had passed since

DePuy’s acquisition by Johnson & Johnson and almost two years had passed since the extended

due date of DePuy’s 1999 corporate income taxes. If DePuy had filed its request in a more

timely manner, approval would have been received before the statute of limitations for the 1999

tax year had run.

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At the administrative hearing, DePuy’s tax director stated that his real concern was the

Department’s failure to grant the refund requested in DePuy’s original 1999 corporate income tax

return, which was filed in September 2000. This issue was not preserved for review, however,

because DePuy failed to file a timely protest to the Department’s inaction. The Department’s

authority to grant refund claims—and the remedies available to a taxpayer whose refund has not

been granted—are set out in NMSA 1978, § 7-1-26. Subsection B(2) states as follows:

(2) If the department has neither granted nor denied any portion of a
claim for refund within one hundred twenty days of the date the claim was
mailed or delivered to the department, the person may refile it within the time
limits set forth in Subsection C of this section or may within ninety days elect to
pursue one, but only one, of the remedies in Subsection C of this section [filing
a protest or filing suit in district court]. After the expiration of the two hundred
and ten days from the date the claim was mailed or delivered to the department,
the department may not approve or disapprove the claim unless the person has
pursued one of the remedies under Subsection C of this section. (Emphasis
added).

In Kilmer v Goodwin, Secretary, New Mexico Taxation and Revenue Department, 2004 NMCA

122, ¶ 16, 99 P.3d 690, the court found that the purpose of the time deadline in § 7-1-26 is to

avoid stale claims, and that “[t]he time deadline places the burden of maintaining an active claim

on the taxpayer and makes it the taxpayer's responsibility to confront the Department inaction.”

In this case, DePuy filed its original 1999 corporate income tax return on September 13,

2000, showing a refund due. The Department did not take action to either grant or deny the

refund. Beginning on January 11, 2001, which was the 120th day from the date of filing, DePuy

had 90 days to either file a protest or file a suit in district court to protect its claim. It failed to do

1
The instructions to New Mexico’s corporate income tax returns are public records of the Department that are
available in paper form or through the Department’s web site.

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so, and as of April 12, 2001, which was the 210th day from the date of filing, the Department

(and the Department’s hearing officer) lost jurisdiction to consider the taxpayer’s claim.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely, written protest to the Department’s denial of its claim

for refund of 1999 corporate income taxes, and jurisdiction lies over the parties and the subject

matter of this protest.

B. The Department’s February 18, 2004 letter giving DePuy retroactive permission to

change to separate entity filing was effective for all years still within the statutory limitations period

set out in NMSA 1978, § 7-1-26.

C. The amended 1999 corporate income tax returns DePuy filed on March 8, 2004

were beyond the statutory limitations period, and the refund requested in those returns was properly

denied.

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

DATED May 12, 2005.

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