How much 2007 New Mexico income tax did Steve and Sheila Lambert owe after omitting a South Dakota retirement distribution and interest income, and did their misunderstanding remove the penalty?

Plain-English summary

Steve and Sheila Lambert owed New Mexico income tax on an omitted South Dakota retirement-system distribution and interest income, but the Department's assessment overstated principal by $120. The correct remaining principal was $2,539, with penalty and interest still due.

The Lamberts moved from South Dakota to New Mexico in fall 2006 and were full-year New Mexico residents in 2007. They timely filed a federal and New Mexico return reporting $44,674 of federal adjusted gross income.

They omitted a $35,975.78 retirement distribution and interest income. They believed the retirement money did not need to be reported because federal tax had already been withheld and because it had been earned in South Dakota, a state without an income tax.

At the hearing, they acknowledged that the omitted income should have been reported. Their dispute focused on how the Department calculated the tax.

Resident retirement and interest income was taxable

New Mexico imposed income tax on the net income of resident individuals, using federal adjusted gross income as the starting point. Because the Lamberts were residents when they received the retirement distribution and interest, those amounts were included in New Mexico income.

Federal withholding of $7,195.16 from the retirement distribution was federal tax withholding; it did not make the distribution disappear from federal or state income. And because South Dakota imposed no income tax, there was no South Dakota tax payment for which New Mexico could give a credit.

The decision found $45,204 of unreported income for assessment purposes, reflecting the retirement distribution and unreported interest. It noted small conflicts and rounding differences in the interest evidence but resolved the amount in the Lamberts' favor.

The tax table supported $3,150, not $3,270

The Department's assessment used a total tax figure of $3,270, producing assessed principal of $2,659 after credits. But its limited-scope audit and hearing testimony identified total New Mexico tax of $3,150.

The hearing officer checked the 2007 tax table and found that $3,150 was the correct tax on $68,978 of New Mexico taxable income. Nothing in the evidence explained the extra $120 used in the assessment.

After subtracting $572 of New Mexico withholding and the Lamberts' $39 payment, the remaining principal was:

• $3,150 correct tax
• minus $572 withheld
• minus $39 paid
• equals $2,539 principal due

Penalty remained despite the honest misunderstanding

The Lamberts described job loss, relocation, an unsold home, and their belief that the distribution had already been taxed. The decision found no legally recognized nonnegligence factor.

Failing to report the income because of that erroneous belief fell within the regulatory definition of negligence. The Department could impose the 20% penalty because the assessment was issued after January 1, 2008. Interest also remained due on the corrected principal.

Result: protest granted in part and denied in part. Principal was reduced to $2,539; penalty and interest remained and had to be recalculated from the corrected amount.

What this means for you

New residents receiving out-of-state retirement money

Where the retirement income was earned did not control this result. The Lamberts were New Mexico residents when they received the distribution, so it entered their resident income-tax calculation.

Taxpayers seeing conflicting assessment numbers

Recalculate from the actual taxable income, tax table, withholding, and payments. The hearing officer reduced principal because the Department could not support the extra $120.

Taxpayers relying on withholding

Withholding is a payment toward tax, not proof that the underlying income may be omitted from the return. The distribution still had to be reported.

Common questions

Q: Why was the South Dakota retirement distribution taxable in New Mexico?
A: The Lamberts were full-year New Mexico residents in 2007, and New Mexico resident tax used federal adjusted gross income as its base.

Q: Did federal withholding mean the distribution was already fully taxed?
A: No. The withheld amount was a federal tax payment; the gross retirement distribution still had to be reported as income.

Q: Why was there no credit for South Dakota tax?
A: South Dakota did not impose an income tax, so no such tax had been paid.

Q: How did the hearing officer reach $2,539?
A: The correct tax-table amount was $3,150, reduced by $572 of state withholding and a $39 payment.

Q: Why did penalty remain?
A: The mistaken belief that the income did not need to be reported fit the decision's definition of negligence, and no recognized nonnegligence circumstance was proved.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-1-17(C) — presumption that Department assessments are correct
• NMSA 1978, §§ 7-2-2(A), (B), and (N)(1) — federal adjusted gross income and net-income framework
• NMSA 1978, § 7-2-3 — tax on resident individuals' net income
• NMSA 1978, § 7-1-69(A)(1) — civil negligence penalty
• 3.1.11.10 and 3.1.11.11 NMAC — negligence and nonnegligence

Cases:

• TPL, Inc. v. Taxation and Revenue Dep't, 2000-NMCA-083, 129 N.M. 539, 10 P.3d 863, rev'd on other grounds, 2003-NMSC-007, 133 N.M. 447, 64 P.3d 474
• MPC Ltd. v. N.M. Taxation and Revenue Dep't, 2003-NMCA-021, 133 N.M. 217, 62 P.3d 308
• Grogan v. New Mexico Taxation and Revenue Dep't, 133 N.M. 354, 62 P.3d 1236 (2002)
• Alarid v. Secretary of NM Taxation and Revenue, 118 N.M. 23, 878 P.2d 341 (Ct. App. 1994)
• GEA Integrated Cooling v. New Mexico Taxation and Revenue Dept., 2012-NMCA-010, 268 P.3d 48

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Steve & Sheila Lambert
• Decision PDF: D&O 13-04

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
STEVE AND SHEILA LAMBERT No. 13-04
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L #0366612032

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on September 13, 2012,

before Monica Ontiveros, Hearing Officer. The Taxation and Revenue Department

(“Department”) was represented by Peter Breen, Esq., attorney for the Department. Ms. Amanda

Carlisle, protest auditor, appeared as a witness for the Department. Steve and Sheila Lambert

(“Taxpayers”) appeared at the appointed time. This matter was originally set for hearing on

February 16, 2012. Taxpayers requested a continuance on February 13, 2012, which the

Department did not oppose. On February 15, 2012, the request for continuance was granted. A

second hearing was set for June 21, 2012. Taxpayers requested a continuance because they were

evacuated from their home because of the Little Bear fire in Ruidoso. The matter was continued

a second time and reset for September 13, 2012. Taxpayer introduced into the record without

objection: Exhibit #A, – 2007 Federal and State Returns (5 pages); Exhibit #B – Letter from Mr.

Goodin (2 pages); Exhibit #C – Letter from the South Dakota Retirement System; and Exhibit

D – Notice of Limited Scope Audit (3 pages). The Department introduced into the record

without objection: Exhibit #1 – Print Screen or notations; Exhibit #2 – Print Screen or notations;

and Exhibit #3 – Client Research income source information.

Based on the aforementioned pleadings, the testimony and evidence introduced at the

hearing, and the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT

1. On September 1, 2011, the Department assessed Taxpayers in personal income

tax in the amount of $2,659.09, $531.80 in penalty and $388.63 in interest for tax year 2007.

Letter Id No. 366612032.

2. On October 13, 2011, Taxpayers requested an extension of time to file a protest.

They also filed a protest at the same time they requested an extension of time to file a protest.

3. On October 26, 2011, the Department granted Taxpayers an extension of time to

file a protest and the Department acknowledged the protest. Letter Id No.1495693888.

4. On November 21, 2011, the Department requested a hearing in this matter.

5. On November 22, 2011, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for February 16, 2012.

6. Taxpayers requested a continuance on February 13, 2012, which the Department

did not oppose.

7. On February 15, 2012, the request for continuance was granted.

8. On March 2, 2012, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for June 21, 2012.

9. On June 21, 2012, Taxpayers requested a continuance because they were being

evacuated from their home because of the Little Bear fire in Ruidoso.

10. The matter was continued a second time and reset for September 13, 2012.

11. On March 16, 2011, Taxpayers received a Notice of Limited Scope Audit from

the Department indicating that Taxpayers had underreported their income to the federal

government and had failed to report any income to New Mexico. Exhibit #D.

In the Matter of the Protest of Steve and Sheila Lambert
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12. The Notice of Limited Scope Audit indicated that the amount of unreported

income to New Mexico was $68,928.00 and the amount of principal tax owed to New Mexico

was $3,150.00. Exhibit #D.

13. Taxpayers moved to New Mexico from South Dakota in the fall of 2006. They

did not have employment when they moved to New Mexico.

14. For tax year 2007, Taxpayers were full time residents.

15. Ms. Carlisle testified that Taxpayers filed a timely return, contrary to what was

indicated on the Notice of Limited Scope Audit. (Audio File; 24:00-26:33).

16. Taxpayers filed a New Mexico income tax return for tax year 2007 reporting the

federal adjusted gross income of $44,674.00 as the amount on line 7 of the New Mexico income

tax return. Exhibit #A, pages A-1 and A-3.

17. The amount of unreported income on both the federal return and the state return

for tax year 2007 was $45,204.00. Exhibit #D.

18. The sources of income which were not reported on the federal return and the New

Mexico return were $35,975.78 in retirement income from the South Dakota retirement system

and $9,228.22 in interest income. Exhibit #3.

19. Ms. Carlisle testified that the unreported sources of income were $39,975.78 from

the South Dakota retirement system and $8,561.00 in interest income. (Audio file; 21:48-26:33).

20. Taxpayers withdrew their retirement income from the South Dakota retirement

system on March 15, 2007 and they did not report the retirement income on their federal return

because they believed that the retirement income had been taxed. Exhibit #C.

21. The South Dakota retirement system refunded to Taxpayers $35,975.78 in

retirement income less $7,195.16 in federal tax. Exhibit #C.

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22. At the time Taxpayers filed their federal and state returns, they believed that their

retirement income should not be taxed because it was earned in South Dakota, which does not

have an income tax.

23. Taxpayers were required to report the retirement income on their federal and state

income tax returns despite federal tax being withheld from the retirement income.

24. For tax year 2007, Taxpayers received interest income in the following amounts:

$45.00 in interest income from Metropolitan Life Insurance Company;

$8,561.00 in interest income from First Bank and Trust; and

$624.00 in interest income from AXA Equitable.

Exhibit #3. There is an additional amount of $114.00 listed as interest income on Exhibit #3.

There was no testimony how this amount ties to the unreported income.

25. The total income received by Taxpayers for tax year 2007 that was not reported

on lines 8a-10 of the federal return was $9,230.00 plus $35,975.78 for a total of $45,205.78.

(There is a slight rounding discrepancy of $1.78 in Taxpayers’ favor.)

26. Taxpayers had $572.00 in state income tax withheld from their wages and a

payment of $39.00 was made by Taxpayers when they filed their 2007 returns. Exhibit A, pages

A3-A4. The payment is noted in the Department’s print screen or notations. Exhibit #2.

27. No other amounts of income tax were reported as being withheld from Taxpayers’

wages.

28. Ms. Carlisle testified that the assessment was based on $89,878.00 of corrected

adjusted gross income and that $3,150.00 was the amount of principal tax due. (Audio File;

26:33).

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29. The Department’s assessment is based on a principal amount of tax of $2,659.00,

which takes into account the amount of tax withheld of $572.00 and the payment made of $39.00

for a total of principal tax of $3,270.00. {Assessment-$2,659.00 assessed amount plus payment

of $39.00 plus withheld amount of $572.00 = $3,270.00}

30. The principal tax due on the assessment of $3,270.00 is a different amount than

the principal tax due stated on the Notice of Limited Scope Audit of $3,150.00. Exhibits #D and

2. {Notice of Limited Scope Audit-$3,150.00 (tax due)-$572.00 (withheld)-$39.00 (payment)

=$2,539.00 (remaining principal tax due)}.

31. There is no evidence why there is a difference of $120.00 between the assessed

principal amount of tax and the amount of tax listed in the Notice of Limited Scope Audit.

32. The 2007 tax table indicates that the correct tax on New Mexico Taxable Income

of $68,978.00 is $3,150.00. In reviewing the 2007 tax table there is no principal amount of tax

listed of $3,270.00. The Hearing Officer took judicial notice of the 2007 tax table which is

available on the Department’s website. The 2007 tax table is made part of the record.

33. At the hearing Taxpayers acknowledged that they should have reported the

unreported income of $45,205.78.

34. The exemption amount for Taxpayers for tax year 2007 is $20,900.00 and it is

undisputed. Exhibit #D.

35. Prior to the hearing, Taxpayers were told that one half of the penalty would be (or

might be) abated. No abatements were made by the Department of one half of the penalty

amount or of $265.90.

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36. Mr. Lambert lost his job in 2011 and he moved to Arizona while his wife stayed in

New Mexico until their house sold. The house never sold. Mr. Lambert found employment in

Ruidoso in 2012. He has since moved back to New Mexico.

DISCUSSION

During the hearing, Taxpayers admitted that they now understand that they owe personal

income tax based on the unreported income. (Audio File; 9:24). Taxpayers argued that they did

not understand how the Department calculated the amount of principal tax due and they argued

that it was not clear whether the Department gave them credit for the amount of tax withheld of

$572.00 and the amount of tax paid of $39.00. (Audio File; 13:16).

Burden of Proof and Standard of Review.

NMSA 1978, Section 7-1-17 (2007) provides that any assessment of taxes made by the

Department is presumed to be correct. Accordingly, it is Taxpayers’ burden to present evidence

and legal argument to show that they are entitled to an abatement, in full or in part, of the

assessment issued against them. NMSA 1978, Section 7-1-17(C) (2007) provides that any

assessment of taxes made by the Department is presumed to be correct. See, TPL, Inc. v.

Taxation and Revenue Dep’t, 2000-NMCA-083, ¶8, 129 N.M. 539, 542, 10 P.2d 3d 863, 866,

cert. granted, 129 N.M. 519, 10 P.3d 843, rev’d on other grounds, 2003-NMSC-7, 133 N.M.

447, 64 P.3d, 474. When a taxpayer presents sufficient evidence to rebut the presumption, the

burden shifts to the Department to show that the assessment is correct. See, MPC Ltd. v. N.M.

Taxation and Revenue Dep’t., 2003-NMCA-021, ¶ 13, 133 N.M. 217, 219-220, 62 P.3d 308,

310-311; Grogan v. New Mexico Taxation and Revenue Dep’t, 133 N.M. 354, 357-58, 62 P.3d

1236, 1239-40 (2002).

New Mexico Income Tax.

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Section 7-2-3 provides that “(a) tax is imposed at the rates specified in the Income Tax

Act [7-2-1 NMSA 1978] upon the net income of every resident individual …” NMSA 1978,

Section 7-2-3 (1981). There is no issue that Taxpayers were resident individuals during the 2007

tax year. “Net income” is defined as “base income” adjusted to exclude specific amounts, which

are not taxed, such as the standard deduction allowed by the federal government. NMSA 1978,

Section 7-2-2(N) (1) (2010). In addition, “base income” incorporates the federal definition of

adjusted gross income. NMSA 1978, Sections 7-2-2(A) and (B) (2010). Thus, the retirement and

interest income that Taxpayers received while residents of New Mexico is subject to New

Mexico tax. See, Alarid v. Secretary of NM Taxation and Revenue, 118 N.M. 23, 878 P.2d 341

(Ct. App. 1994).

At the hearing, Taxpayers did not dispute that they owed tax on the retirement and

interest income that they failed to report to New Mexico. (Audio File; 9:24). Taxpayers testified

that they had recently moved to New Mexico from South Dakota in the fall of 2006 and they

believed that because federal income tax had been withheld from the retirement income that they

did not need to report the amount of retirement income of $35,975.78 that they received on

March 15, 2007. Exhibit #C. The South Dakota retirement system refunded to Taxpayers

$35,975.78 in retirement income less $7,195.16 in federal tax. Exhibit #C. The interest income

that they received in 2007 was also not reported. Mr. Lambert thought that perhaps the

distribution of some of the interest income occurred in a prior year. He presented no evidence to

substantiate this fact. (Audio File; 14:47).

Calculation of Income Tax Due.

The sole issue is the calculation of the amount of principal tax owed by Taxpayers. At

the hearing Taxpayers complained that they were not sure how the Department arrived at the

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amount of tax owed and that the Notice of Limited Scope Audit and the Notice of Assessment

had different amounts of principal tax owed.

The principal amount of tax due is $2,539.00, which is different than the assessed

amount. The Notice of Limited Scope Audit indicates that the total New Mexico tax due was

$3,150.00 which was confirmed by Ms. Carlisle. Exhibit #D. The Department assessed

Taxpayer for a principal amount of tax of $2,659.00, which is different than the principal tax due

stated on the Notice of Limited Scope Audit. Exhibits #D and #2. {$3,150.00 (tax due)-$572.00

(withheld)-$39.00 (payment) =$2,539.00 (principal amount of tax due)}. There is no evidence

why there is a difference of $120.00 between the assessed principal amount of tax and the

amount of tax listed in the Notice of Limited Scope Audit. The 2007 tax table indicates that the

correct tax on New Mexico Taxable Income of $68,978.00 is $3,150.00. In reviewing the 2007

tax table there is no principal amount of tax listed of $3,270.00. The Hearing Officer took

judicial notice of the 2007 tax table which is available on the Department’s website. The

Department confirmed at the hearing that the amount of principal tax due was $3,150.00. (Audio

File; 24:31-26:33).

The amount of principal tax due is calculated by determining the amount of unreported

income. Even if you calculate the unreported income, this calculation does not add up to a

principal amount of tax of $3,270.00. The amount of unreported income for purposes of the

New Mexico return was $45,204.00 ($35,975.78 in retirement income and $9,228.22 in interest

income). Exhibits #D, #3 and testimony from Ms. Carlisle Audio File 26:33. There was some

conflicting testimony by the Department regarding the correct amount of unreported interest

income. The Hearing Officer decided that the most likely amount of unreported interest income

was $9,228.22.

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For tax year 2007, the sources of unreported interest income included the following

amounts: $45.00 in interest income from Metropolitan Life Insurance Company; $8,561.00 in

interest income from First Bank and Trust; and $624.00 in interest income from AXA Equitable.

Exhibit #3. The total income received by Taxpayers for tax year 2007 that was not reported on

lines 8a-10 of the federal return for tax year was $9,230.00 plus $35,975.78 for a total of

$45,205.78. (There is a slight rounding discrepancy of $1.78 in Taxpayers’ favor.) The only

amounts discussed by the Department as being unreported were $35,975.78 in retirement

income, $45.00 in interest income from Metropolitan Life Insurance Company and $8,561.00 in

interest income from First Bank and Trust. Thus, the Department’s own presentation of evidence

does not substantiate the principal amount of tax assessed or $3,270.00.

There is no dispute that Taxpayers filed a New Mexico income tax return for tax year

2007 reporting the federal adjusted gross income of $44,674.00 on their New Mexico return.

Exhibit #A, pages A3-A4. There is also no dispute as to the exemption amount claimed by

Taxpayers. The Department does not dispute that $572.00 in state income taxes was withheld

from Taxpayers’ wages and that a payment of $39.00 was made to the Department. The

payment is noted in the Department’s print screen or notations and the Department

acknowledged the payment at the hearing. Exhibit #2.

Therefore, the amount of unreported income is $45,204.00 and the amount of principal

tax due is $3,150.00.

Civil Penalty.

Prior to the hearing, Taxpayers were told that one half of the penalty would be (or might

be) abated. No abatements were made by the Department of one half of the penalty amount or of

$265.90. The Court of Appeals has ruled that the 20% percent penalty may be imposed if the

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date of assessment is post January 1, 2008. See, GEA Integrated Cooling v. New Mexico

Taxation and Revenue Dept, 2012-NMCA-010, 268 P. 3d 48. The Notice of Assessment was

issued post January 2008. Therefore, the Department may impose a penalty of 20% percent,

irrespective of any conversations Taxpayers had with the Department’s employees.

Civil penalty is imposed when a taxpayer is “negligent” or disregards the Department’s

rules and regulations. Section 7-1-69(A) states that:

(e)xcept as provided in Subsection C of this section, in the case of failure due to
negligence or disregard of department rules and regulations, but without intent
to evade or defeat a tax, to pay when due the amount of tax required to be paid,
to pay in accordance with the provisions of Section 7-1-13.1 NMSA 1978 when
required to do so or to file by the date required a return regardless of whether a
tax is due, there shall be added to the amount assessed a penalty in an amount
equal to the greater of:

(1) two percent per month or any fraction of a month from the date the
tax was due multiplied by the amount of tax due but not paid, not to exceed
twenty percent of the tax due but not paid;

(Emphasis added). NMSA 1978, Section 7-1-69 (A) (1) (2007).

The Department’s regulation provides that “negligence” includes “failure to exercise

ordinary business care and prudence which reasonable taxpayers would exercise under like

circumstances; inaction where action is required; inadvertence, indifference, thoughtlessness,

carelessness, erroneous belief or inattention.” See Regulation 3.1.11.10 NMAC (2001).

Taxpayers’ reasons for failing to report correctly fall within the definition of

“negligence.” Mr. Lambert testified that he lost his job in 2011. He was forced to move to

Arizona while his wife stayed in New Mexico until their house sold. The house was never sold.

Eventually, Mr. Lambert found employment in Ruidoso. Taxpayers also testified that they

believed that the tax had already been withheld so therefore they did not have to include the

unreported amounts as income. There was a third argument related to a nonexistent credit from

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the State of South Dakota. However, since South Dakota does not have an income tax there is no

credit to be given for a tax that was never paid.

No testimony or evidence was offered indicating that any legally recognizable indications

of non negligence were present. See Regulation 3.1.11.11 NMAC (2001) defining non

negligence. Taxpayers’ reasons for underreporting their income fall within the definition of

“negligence.”

CONCLUSIONS OF LAW

A. Taxpayers filed a timely written protest of the Notice of Assessment Letter Id No.

366612032 for personal income taxes, in the amount of $2,659.09 in principal, $531.80 in penalty

and $388.63 in interest for tax year 2007.

B. The Department proved by a preponderance of the evidence that Taxpayers failed to

report income in the amount of $45,204.00 for tax year 2007.

C. Taxpayers were full time residents for tax year 2007.

D. The amount of principal tax due is $3,150.00 less the amount of tax withheld and

any payments made.

E. To the extent that there is a discrepancy between the amount of principal tax due of

$3,150.00, less the amount of tax withheld and any payments made, Taxpayers only owe the

remaining balance of principal tax, plus penalty and interest.

F. Taxpayers were negligent in underreporting tax to the State of New Mexico and owe

penalty.

For the foregoing reasons, the Taxpayers' protest IS PARTLY DENIED AND PARTLY

GRANTED.

DATED: February 25, 2013

In the Matter of the Protest of Steve and Sheila Lambert
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Monica Ontiveros
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, §7-1-25 (1989), the Taxpayers have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of

the date shown above. See NMRA, 12-601 of the Rules of Appellate Procedure. If an appeal is

not filed within 30 days, this Decision and Order will become final. A party filing an appeal

shall file a courtesy copy of the appeal with the Hearings Bureau contemporaneously with the

filing of the Notice with the Court of Appeals so that the Hearings Bureau may prepare the

record proper.

CERTIFICATE OF SERVICE

On February 26, 2013, a copy of the foregoing Decision and Order was mailed via certified

mail #7008 0500 0001 4688 4997 to Steve and Sheila Lambert located at P.O. Box 1296, Alto, NM

88312-1296, and delivered through interoffice mail to Peter Breen, Esq. Taxation and Revenue

Department, Santa Fe, New Mexico.

John Griego

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