Could a Madoff fraud victim avoid interest when a theft-loss carryback unexpectedly increased her 2005 New Mexico income tax, even though the penalty was abated?

Plain-English summary

Dyanna Taylor owed $430.62 in interest even though the extra tax arose from an amended return connected to her losses in the Madoff fraud. The Department could forgive the negligence penalty, but it had no general discretion to waive statutory interest.

Taylor was a victim of the Madoff investment-fund fraud. Accountants advised her to carry the theft loss back across earlier tax years, which required amending her 2005 federal and New Mexico personal income tax returns.

For reasons Taylor could not explain at the hearing, the carryback increased her 2005 New Mexico tax liability by $1,344. She paid that principal when she filed the amended return shortly before December 14, 2009.

Penalty and interest followed different rules

The Department initially assessed $264.20 in penalty and $430.62 in interest. After Taylor explained the fraud and her history of tax compliance, it abated the penalty. She continued protesting the interest.

Section 7-1-67 said interest “shall” be paid on tax not paid by its due date. The hearing officer treated that language as mandatory and explained that interest compensates the state for the time value of unpaid revenue.

Unlike the penalty statute, the interest statute did not contain a general exception for a good-faith mistake of law on reasonable grounds. It listed seven specific exceptions, and none applied to Taylor.

Interest therefore ran from the original due date—April 15, 2006—until Taylor paid the additional tax with her amended return. Her victimization and otherwise compliant record could support penalty relief but could not create authority to waive interest.

Result: protest denied. Taylor owed $430.62 in interest; the $264.20 penalty remained abated.

What this means for you

Taxpayers amending old returns

An amended return that increases tax can generate interest back to the original due date, even when the amendment is filed voluntarily and promptly after professional advice.

Fraud victims and taxpayers with sympathetic facts

Good faith may matter for a negligence penalty, but it does not automatically affect interest. The statutory interest exceptions must be checked separately.

Accountants calculating carrybacks

Model both principal and interest before filing. The tax effect in one year can be counterintuitive even when the overall strategy is designed to recover losses.

Common questions

Q: Did Taylor pay the additional $1,344 tax?
A: Yes. She paid it when she filed the amended 2005 return.

Q: Why did the Department abate the penalty?
A: It determined that Taylor was not civilly negligent after considering her circumstances as a fraud victim.

Q: Why was interest different?
A: Section 7-1-67 made interest mandatory and did not include the penalty statute's general good-faith exception.

Q: From what date did interest run?
A: From April 15, 2006, the original due date for the 2005 tax, until payment.

Q: How much interest remained?
A: $430.62.

Citations and references

Statute and regulation:

• NMSA 1978, § 7-1-17(C) and Regulation 3.1.6.13 NMAC — assessment and interest presumption
• NMSA 1978, § 7-1-67 — mandatory interest from original due date
• NMSA 1978, § 7-1-69(B) — good-faith penalty exception

Cases cited:

• Archuleta v. O'Cheskey, 1972-NMCA-165
• Chevron U.S.A., Inc. v. State ex rel. Department of Taxation & Revenue, 2006-NMCA-050
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Dyanna Taylor
• Decision PDF: D&O 13-24

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
DYANNA TAYLOR No. 13-24
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0488890432

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on September 4, 2013 before

Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Dyanna Taylor (“Taxpayer”)

appeared pro se. Staff Attorney Kathleen Carlow appeared representing the State of New

Mexico, Taxation and Revenue Department (“Department”). Protest Auditor Mary Griego

appeared as a witness for the Department. Other than referencing documents contained in the

Hearing Bureau’s administrative file, which are all part of the record of this proceeding, neither

party tendered any exhibits. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer was a victim of the Madoff investment funds fraudulent scheme.

2. Taxpayer consulted with accountants about how to address the significant

financial losses she suffered from the Madoff fraud. Accountants advised Taxpayer to do a loss

carry-back for her Madoff financial losses over previous personal income tax years.

3. Because of this loss carry-back process over multiple tax years, Taxpayer needed

to amend her 2005 federal and state personal income tax returns.

4. At some unspecified point shortly before December 14, 2009, Taxpayer filed an

amended 2005 state personal income tax return showing an increased income tax liability.

Taxpayer paid this additional $1,344.00 in state personal income tax liability at the time she filed

the amended return. [Taxpayer’s December 16, 2009 Protest Letter].

5. On December 14, 2009, the Department assessed Taxpayer $264.20 in penalty

and $430.62 in interest for a total assessment of $694.825 for the personal income tax reporting

period ending December 31, 2005. [Letter id. no. L0488890432].

6. On December 16, 2009, Taxpayer submitted a protest letter. In that letter,

Taxpayer explained how she had been a victim of the Madoff fraud and followed the advice of

her accountants to amend her tax returns to reflect a loss carry-back for multiple tax years.

7. On January 22, 2010, the Department abated the assessed penalty. [Taxpayer’s

January 26, 2010 Amended Protest Letter].

8. On January 26, 2010, Taxpayer submitted an amended protest letter to the

Department, acknowledging that the Department had abated penalty but continuing to protest the

assessment of interest because she had been an unknowing victim of Madoff’s fraud and because

of her previous record of tax compliance. [Taxpayer’s January 26, 2010 Amended Protest

Letter].

9. On February 19, 2010, the Department acknowledged receipt of Taxpayer’s

January 26, 2010 amended protest letter. Although unnecessary in light of Taxpayer’s timely and

clear December 16, 2009 protest letter, out of abundance of caution, the Department also granted

Taxpayer a retroactive extension of time in which to file a protest.

10. On May 6, 2013, the Department requested a hearing in this matter.

In the Matter of the Protest of Dyanna Taylor, page 2 of 5

11. On May 7, 2013, the Hearing Bureau issued Notice of Administrative Hearing,

scheduling this matter for September 4, 2013.

DISCUSSION

Taxpayer suffered significant financial losses as a victim of Madoff’s extensive fraud. In

order to try to recover some small amount of her losses, accountants advised Taxpayer to amend

multiple years of personal income tax returns in order to claim a carry-back theft loss. For

reasons that Taxpayer was unable to explain at hearing, claiming this carry-back theft loss

increased Taxpayer’s 2005 state personal income tax liability. Taxpayer paid this additional

liability when she filed her 2005 amended state income tax return at some unspecified point

before December 14, 2009. On December 14, 2009, the Department assessed Taxpayer for

penalty and interest on the increased 2005 state personal income tax liability. Taxpayer timely

protested that assessment. After reviewing Taxpayer’s protest letter articulating that she was a

victim of Madoff’s fraud, the Department abated penalty in this case. Taxpayer continues to

protest the assessment of interest because she had been an unknowing victim of Madoff’s fraud

and because of her previous record of tax compliance.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment issued in this case is

presumed correct. See also Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431.

Under Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C)

extends to the Department’s assessment of interest. See Chevron U.S.A., Inc. v. State ex rel. Dep't

of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M. 498, 503 (agency regulations interpreting

a statute are presumed proper and are to be given substantial weight). Consequently, Taxpayer must

establish that she is entitled to abatement of the assessed interest.

In the Matter of the Protest of Dyanna Taylor, page 3 of 5
When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute,

regardless of the reason for non-payment of the tax, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

146 N.M. 24, 32 (use of the word “shall” in a statute indicates provision is mandatory absent clear

indication to the contrary).

Moreover, unlike the penalty statute, NMSA 1978, Section 7-1-69 (B) (2007), the interest

statute under Section 7-1-67 does not provide a general exception for a mistake of law made in good

faith and on reasonable grounds. The seven specific exceptions to the imposition of interest

articulated under Section 7-1-67 (A) are not applicable in this protest. Since the Legislature created

a general exception under the penalty statute but choose not to do so under the interest statute, it is

clear that the Legislature intended interest to be mandatory regardless of the reason for a taxpayer’s

non-payment of the tax when due, unless a taxpayer falls under one of the narrow, articulated

exceptions that do not apply in this case.

The language of Section 7-1-67 also makes it clear that interest begins to run from the

original due date of the tax until the tax principal is paid in full. The Department has no discretion

under Section 7-1-67 and must assess interest against Taxpayer from the time the personal income

tax was due but not paid on April 15, 2006 until when Taxpayer paid the taxes with her amended

2005 personal income tax returns.

Taxpayer’s situation as an unfortunate victim of Madoff’s fraud is sympathetic. Probably in

recognition that Taxpayer was a victim in this matter, the Department determined Taxpayer was not

In the Matter of the Protest of Dyanna Taylor, page 4 of 5
civilly negligent and rightfully exercised its authority to abate the assessed penalty. However,

because the Department lacks statutory authority to abate interest regardless of Taxpayer’s

sympathetic circumstances, Taxpayer is liable for the assessed interest. Taxpayer’s protest is

denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the assessment. Jurisdiction lies over the

parties and the subject matter of this protest.

B. Under NMSA 1978, Section 7-1-67 (2007), Taxpayer is liable for accrued interest

under the assessment, as that statute’s use of the word “shall” makes imposition of interest

mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

146 N.M. 24, 32 (use of the word “shall” in a statute indicates provision is mandatory absent clear

indication to the contrary).

For the foregoing reasons, Taxpayer’ protest IS DENIED. Taxpayer owes $430.62 in

interest under the assessment.

DATED: September 18, 2013.

Brian VanDenzen, Esq.,
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Dyanna Taylor, page 5 of 5