Could Texas residents claim the full New Mexico special-needs adopted-child credit and revive a 2007 claim based on a later National Guard deployment?

Plain-English summary

Timothy and Teresa Martin received the special-needs adopted-child credit for all eight eligible children in 2008 through 2010, subject to New Mexico income apportionment, but their 2007 claim was too late. Timothy's National Guard deployment began only after the 2007 limitation period had already expired.

The Martins lived in El Paso, Texas. Teresa earned New Mexico income working for the Santa Teresa School District, but the couple initially filed no New Mexico personal income tax returns for 2007 through 2010.

They filed 2007 and 2008 returns after 2011 audit notices without claiming the adopted-child credit. Timothy deployed with the New Mexico National Guard to Egypt in January 2012, and the Department extended the 2009 audit until he returned.

After returning around January 2013, Timothy learned of the credit and filed or resubmitted returns for all four years claiming it for the couple's eight adopted children.

The Department expanded the allowed children and years

The Department initially allowed only four children for 2009 and 2010. After reviewing paperwork for all eight, it conceded at the hearing that every child qualified in those two years.

After the hearing officer requested briefing on the Servicemembers Civil Relief Act, the Department also granted the 2008 claim.

The decision did not state the final refund amounts after those adjustments.

Nonresident apportionment still applied

Section 7-2-18.16 provided a refundable $1,000 annual credit for each eligible child. But the regulation directed that credit to be apportioned under the nonresident income-allocation statute.

The Department used the Martins' reported New Mexico income percentages—.661 for 2009 and .323 for 2010—rather than allowing the full face amount. The decision held that method correct and said it also applied to 2008.

Language in the regulation saying that no “separate process” was necessary did not eliminate apportionment; it meant no process beyond the one already established in Section 7-2-11 was needed.

The 2007 claim expired before deployment

The 2007 return was due April 15, 2008. Both the income-tax credit statute and the refund statute made December 31, 2011 the last day to claim the credit.

The Martins first claimed it in February or March 2013, more than a year late. Timothy's deployment started in January 2012, after the deadline had already passed, so it could not preserve the expired 2007 claim.

The audit-offset rule did not help because there was no tax underpayment in another audited period to offset. A provision treating a return showing a balance due as a refund claim defined what counted as a claim but did not make it timely.

The regulation allowing a claim within one year after certain older-period assessments also did not apply. The Martins had received audit notices, but after they filed returns showing no liability the Department issued no assessment for 2007.

Result: protest DENIED EXCEPT FOR DEPARTMENT ADJUSTMENTS. Credits for all eight children were allowed for 2008, 2009, and 2010, apportioned by New Mexico income; the 2007 credit remained denied as untimely.

What this means for you

Nonresidents claiming New Mexico credits

A refundable credit's headline amount may be reduced by the same New Mexico income allocation used elsewhere on the nonresident return. Check both the credit statute and apportionment rules.

Servicemembers with pending tax rights

Identify deadlines before deployment and determine whether federal tolling applies while the period is still open. This ruling did not revive a claim whose deadline had already expired.

Taxpayers responding to an audit notice

An audit is not automatically an assessment. Provisions tied specifically to an assessment did not apply when taxpayers filed returns showing no liability and the Department assessed nothing.

Common questions

Q: How many children ultimately qualified?
A: All eight for 2008, 2009, and 2010 after the Department's adjustments.

Q: Did the Martins receive $1,000 per child without reduction?
A: No. The decision upheld apportionment by their New Mexico income percentage.

Q: Why was 2008 allowed but 2007 denied?
A: The Department granted 2008 after federal servicemember-tolling briefing, while the 2007 deadline had expired before deployment began.

Q: Did the audit notice extend the 2007 refund deadline?
A: No. The cited regulation required an assessment, and none was issued for that year.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-18.16 and 7-2-11(C) and Regulation 3.3.4.10(D) NMAC — adopted-child credit and nonresident apportionment
• NMSA 1978, §§ 7-2-12 and 7-2-12.1 — return due date and credit-claim limitation
• NMSA 1978, § 7-1-26(D), (F), and (J) — refund limitation, audit offset, and claim definition
• Regulation 3.1.9.12(B) NMAC — claim following an assessment for an older period
• 50 U.S.C. § 526 — Servicemembers Civil Relief Act limitation tolling

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — taxpayer's burden to establish tax relief
• Kilmer v. Goodwin, 2004-NMCA-122 — purpose of refund limitation periods
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory effect of “shall”

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Timothy and Teresa Martin
• Decision PDF: D&O 13-38

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
TIMOTHY & TERESA MARTIN No. 13-38
TO DENIAL OF REFUND ISSUED UNDER LETTER
ID NO. L2112729920

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on November 6, 2013, before

Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Mr. Timothy Martin appeared pro se,

representing Timothy and Teresa Martin (“Taxpayers”). Staff Attorney Aaron A. Rodriguez

appeared representing the State of New Mexico, Taxation and Revenue Department

(“Department”). Protest Auditor Andrick Tsabetsaye appeared as a witness for the Department.

Taxpayer Exhibit #1-4 and Department Exhibits A- B were admitted into the record, as described

in the Administrative Exhibit Log. At the request of the Hearing Officer, on November 22, 2013,

the Department submitted final briefing on the question of whether the Servicemembers Civil

Relief Act, 50 U.S.C. §526, applied in this matter. Based on the evidence and arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayers live in El Paso, Texas. Teresa Martin works for the Santa Theresa

School District in New Mexico, where she earns income in New Mexico.

2. Taxpayers did not originally file personal income tax returns in New Mexico for

the relevant personal income tax years: 2007, 2008, 2009, 2010.

3. Through information it received from the New Mexico Department of Workforce

Solutions, the Department discovered that Teresa Martin had New Mexico income in each

relevant year.

4. On August 10, 2011, the Department sent Taxpayers Notices of Limited Scope

Audit for personal income tax years 2007 and 2008. [Taxpayer Ex. #’s 1-2].

5. In response to those Notices of Limited Scope Audit, at an unspecified date in

October 2011, Taxpayers e-filed their 2007 and 2008 New Mexico personal income returns.

Taxpayers did not make a claim for Special Needs Adopted Child Tax Credit at that time.

6. In January 2012, Timothy Martin was deployed with the New Mexico National

Guard to Egypt for 12-months.

7. While Mr. Martin was deployed, Taxpayers received the Department’s Notice of

Limited Scope Audit for personal income tax year 2009.

8. Because Mr. Martin was deployed, the Department granted Taxpayers an

extension on the Limited Scope Audit for personal income tax year 2009 until Mr. Martin

returned from Egypt.

9. Mr. Martin completed his deployment in December of 2012 and returned home by

January of 2013.

10. Upon returning from his deployment, Mr. Martin began to prepare Taxpayers’

2009 New Mexico personal income tax return. In preparing that return, Mr. Martin first became

aware of the Special Needs Adopted Child Tax Credit.

11. In February or March of 2013, Mr. Martin prepared and submitted Taxpayers’

2009 and 2010 New Mexico personal income tax returns, claiming the Special Needs Adopted

Child Tax Credit for all eight of Taxpayers’ children.

In the Matter of the Protest of Timothy and Teresa Martin, page 2 of 10

12. Mr. Martin also called the Department to inquire about amending Taxpayers’

2007 and 2008 New Mexico personal income tax returns in light of his discovery of the Special

Needs Adopted Child Tax Credit. Mr. Martin was told that his 2007 and 2008 New Mexico

personal income tax returns had not ever been processed by the Department.

13. In February or March of 2013, Mr. Martin resubmitted Taxpayers 2007 and 2008

New Mexico personal income tax returns, claiming the Special Needs Adopted Child Tax Credit

on all eight of Taxpayers’ children in each year.

14. Taxpayers did not make a claim for the Special Needs Adopted Child Tax Credit

within three years from the end of the calendar year in which the claim first could have been

made for the 2007 personal income taxes (December 31, 2011).

15. On May 20, 2013, the Department only granted Taxpayers a partial refund for

four of the Taxpayers’ children for personal income tax years 2009 and 2010. The Department

did not grant Taxpayers’ claim for the Special Needs Adopted Child Tax Credit in personal

income tax years 2007 and 2008. [Letter id. no. L2112729920].

16. In partially granting Taxpayers’ credit in 2009 and 2010, the Department applied

Taxpayers’ allocation of income to New Mexico percentage, as required under NMSA 1978,

Section 7-2-11 (C) (2001), in personal income tax years 2009 (.661) and 2010 (.323) to

determine what percentage of the $1000.00 per child Special Needs Adopted Child Tax Credit

Taxpayers’ were entitled to claim. [Letter id. no. L2112729920].

17. On August 20, 2013, Taxpayers protested the Department’s allocation of the

Special Needs Adopted Child Credit in tax years 2009 and 2010, the denial of the Credit for four

of Taxpayers’ children in 2009 and 2010, and the denial of Taxpayers’ claim for the Credit in

personal income tax years 2007 and 2008.

In the Matter of the Protest of Timothy and Teresa Martin, page 3 of 10

18. On August 27, 2013, the Department acknowledged receipt of Taxpayers’ protest.

19. On September 27, 2013, the Department requested a hearing in this matter.

20. On September 30, 2013, the Hearing Bureau issued Notice of Administrative

Hearing, scheduling this matter for November 6, 2013.

21. After reviewing Taxpayers paperwork on all eight of Taxpayers’ adopted

children, the Department conceded at hearing that Taxpayers were entitled to the Special Needs

Adopted Child Tax Credit for all eight children rather than the four initially allowed.

22. After the hearing, in response to a request for briefing on the applicability of the

Servicemembers Civil Relief Act, 50 U.S.C. §526, the Department granted Taxpayers’ claim for

the Special Needs Adopted Child Tax Credit in personal income tax year 2008.

DISCUSSION

Taxpayers are residents of Texas whom initially did not file New Mexico personal

income tax returns in 2007, 2008, 2009, and 2010. The Department detected that Ms. Martin had

income earned in New Mexico as an employee of public schools in Santa Teresa, New Mexico.

The Department sent Taxpayers a notice of limited scope audit for 2007, 2008, and 2009. In

2013, Taxpayers prepared and filed their New Mexico personal income tax returns for each year,

claiming a Special Needs Adopted Child Tax Credit for all eight of their adopted children. The

Department partially granted Taxpayers’ Special Needs Adopted Child Tax Credit for four

children in tax years 2009 and 2010, prorated consistent with Taxpayers allocation of income

percentage in those years. Taxpayers protested this partial denial of claim for credit. After the

Department made two adjustments to the partial claim for credit, only two protested issues

remain relevant: whether the Department properly prorated the credit by using the apportionment

of New Mexico income percentage reported by Taxpayers in each relevant year; and whether

In the Matter of the Protest of Timothy and Teresa Martin, page 4 of 10
Taxpayers claim for Special Needs Adopted Child Tax Credit for personal income tax year 2007

was barred under the relevant statute of limitations.

Presumption of Correctness.

The presumption of correctness under NMSA 1978, Section 7-1-17 (C) (2007) does not

attach in this matter because the Department did not issue an assessment under Section 7-1-17.

However, Taxpayers nevertheless have the burden to establish that they were entitled to their claim

for credit. “Where an exemption or deduction from tax is claimed, the statute must be construed

strictly in favor of the taxing authority, the right to the exemption or deduction must be clearly and

unambiguously expressed in the statute, and the right must be clearly established by the taxpayer.”

Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735, 740

(internal citation omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7,

¶9, 133 N.M. 447, 451. While this protest deals with the claim for a tax credit rather than a

deduction or exemption, a claim for a credit is analogous enough to a deduction or exemption that

the rationale articulated in Wing Pawn Shop extends to a claim for credit. Consequently, under Wing

Pawn Shop, Taxpayers must establish that they were entitled to the Special Needs Adopted Child

Tax Credit.

Apportionment.

The Special Needs Adopted Child Tax Credit is found under NMSA 1978, Section 7-2-

18.16 (2007). Section 7-2-18.16 allows for a $1,000.00 refundable credit in each tax year for

each eligible child. However, under Regulation 3.3.4.10 (D) NMAC (12/14/00), the Credit under

Section 7-2-18.16 is to be apportioned consistent with NMSA 1978, Section 7-2-11 (C). See

Chevron U.S.A., Inc. v. State ex rel. Dep't of Taxation & Revenue, 2006-NMCA-50, ¶16, 139 N.M.

In the Matter of the Protest of Timothy and Teresa Martin, page 5 of 10
498 (agency regulations interpreting a statute are presumed proper and are to be given substantial

weight).

Taxpayers argued that apportionment is not required because Regulation 3.3.4.10 (D)

NMAC (12/14/00) continues on to say that “no separate process is necessary to apportion the

exemption provided by Section 7-2-5.4 NMSA 1978.” However, when read within the overall

context of Regulation 3.3.4.10 (D) NMAC (12/14/00) and Section 7-2-11, this provision simply

means that there is no distinct apportionment process needed beyond the apportionment process

already codified under Section 7-2-11. See Regents of the Univ. of New Mexico v. New Mexico

Fed'n of Teachers, 1998-NMSC-20, ¶28, 125 N.M. 401 (statutes are to be interpreted in a manner to

give the entire statute effect and not render portions of the statute superfluous). Moreover, it should

be noted that Section 7-2-5.4 referenced in the latter portion of Regulation 3.3.4.10 (D) has been

repealed, rendering that portion of the regulation superfluous.

Turning to Section 7-2-11 (C), that statute reads in pertinent part that “[a] taxpayer may

claim a credit in an amount equal to the amount of tax determined to be due…multiplied by the non-

New Mexico percentage.” In other words, a taxpayer may only receive a credit in the same

proportion as their apportionment of New Mexico income versus non-New Mexico income

percentage. The Department used Taxpayers’ income percentage to calculate the proportions of the

Special Needs Adopted Child Tax Credit Taxpayers were entitled to in 2009 and 2010. Under the

plain language of Section 7-2-11 (C), the Department’s apportionment method was correct. That

same apportionment method extends to Taxpayers’ claim for credit in tax year 2008.

Statute of Limitations on 2007 Claim for Credit.

Taxpayers also argued that they were entitled to a refund for the Special Needs Adopted

Child Credit in personal income tax year 2007 on multiple grounds.

In the Matter of the Protest of Timothy and Teresa Martin, page 6 of 10
Taxpayers’ claim for credit of 2007 tax was untimely under two statutory provisions. First,

NMSA 1978, Section 7-2-12.1 (1990) sets a limit on the length of time a claim for a credit or rebate

can be made under New Mexico’s Income Tax Act. In pertinent part, under Section 7-2-12.1,

a credit… that is claimed shall be disallowed if the claim for the
credit…was first made after the end of the third calendar year
following the calendar year in which the return upon which the credit
or tax rebate was first claimable was initially due.

In this case, a claim for credit on 2007 personal income taxes was first claimable on Taxpayers’

April 15, 2008 personal income tax return. See NMSA 1978, § 7-2-12 (2003). The end of the third

calendar year following the end of 2008 was December 31, 2011. Under Section 7-2-12.1, the

Department must disallow any 2007 income tax credit claimed after December 31, 2011. See

Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24 (use

of the word “shall” in a statute indicates provision is mandatory absent clear indication to the

contrary).

Similarly, under the second statutory provision, NMSA 1978, Section 7-1-26 (D) (1)

(2007, before 2013 amendment), no credit or refund can be granted unless as a result of a claim

made within three-years of the end of the calendar year in which the tax was due. Again, under

Section 7-2-12, 2007 personal income tax returns were due on April 15, 2008, making December

31, 2011 the three year deadline under Section 7-1-26 (D) (1) for a claim for credit or refund. In

Kilmer v. Goodwin, 2004-NMCA-122, 136 N.M. 440, the New Mexico Court of Appeals

addressed claims for refunds under Section 7-1-26 (B). Although the Kilmer court was

addressing a different subparagraph of Section 7-1-26, the Court of Appeals noted that the

Legislative purpose of the deadlines under NMSA 1978, Section 7-1-26 is “to avoid stale claims,

which protects the Department's ability to stabilize and predict, with some degree of certainty,

In the Matter of the Protest of Timothy and Teresa Martin, page 7 of 10
the funds it collects and manages.” Kilmer, ¶16. That same rationale is equally compelling to the

three-year statute of limitation deadline under Section 7-1-26 (D) (1).

In this case, Taxpayers did not make their claim for the Special Needs Adopted Child Tax

Credit until February or March 2013, over a year after the expiration of the statute limitations on

a claim for refund under Section 7-2-12.1 and Section 7-1-26 (D) (1). Moreover, the December

31, 2011 statute of limitation deadlines under both Section 7-2-12.1 or Section 7-1-26 (D) (1)

had already expired before Mr. Martin was deployed in 2012. Taxpayers’ claim for credit on the

2007 personal income tax was untimely and time-barred by the statute.

Taxpayers argued that even if their claim for credit was beyond the statute of limitations,

they still believed they were entitled to their claim under Section 7-1-26 (F) because the claim

resulted from an audit. However, Section 7-1-26 (F) only allows for the credit of an overpayment in

one period of the audit to offset the underpayment of tax in another audit period in audits involving

multiple reporting periods. In this case, there is no evidence that Taxpayers had a tax liability in any

other audit period that could be offset by the claimed 2007 credit.

Taxpayers also cited Section 7-1-26 (J)1 as a basis for the claimed credit. Section 7-1-26 (J)

simply indicates that the filing of return showing a balance due to a taxpayer or the filing of an

amended return showing a balance due to a taxpayer constitutes the filing of a claim for refund. This

is a provision that defines what constitutes a claim for refund, not whether a claim is timely filed.

There is no doubt that Taxpayers made a claim for credit under this section, but that does not

establish whether those claims were timely.

Taxpayers also cited Regulation 3.1.9.12 (B) NMAC as a basis to support the 2007 claim for

1
Taxpayers actually referred to Section 7-1-26 (I) (2013), which reflected an amended and renumbered statute
effective in July 2013. However, under the statute controlling for a 2007 claim for refund, Section 7-1-26 (J)
contained the same substance as current subsection I.

In the Matter of the Protest of Timothy and Teresa Martin, page 8 of 10
credit. Regulation 3.1.9.12 (B) NMAC reads

When the department has assessed tax for periods specified in
Subsections 7-1-18 B, C or D NMSA 1978 and the assessment
applies to a period ending at least three years prior to the beginning
of the year in which the assessment is made, the taxpayer may
submit a claim for refund with respect to those periods for which an
assessment is made. Any such claim for refund must be submitted
within one year of the date of the assessment.

Taxpayers’ argument requires that the word “assessment” in this Regulation be read to include the

Department’s Notice of Audit. However, an audit and an assessment are two distinct legal concepts

with separate meanings: assessments are governed by NMSA 1978, Section 7-1-17 (2007), while

audits are governed by NMSA 1978, Section 7-1-11-11.2. Because after receiving the Notice of

Audit, Taxpayers filed their 2007 tax returns reporting no tax liability, the Department never issued

an assessment to Taxpayers under subsection (B), (C) or (D) of NMSA 1978, Section 7-1-18

(1994). Consequently, under the plain language of the statute, in the absence of an assessment,

Regulation 3.1.9.12 (B) NMAC does not apply to Taxpayers’ 2007 personal income tax claim for

credit.

In summary, under the relevant statute of limitations, the Department lacks authority to

grant Taxpayers’ untimely claim for credit on the 2007 personal income tax. Because no other

statutory or regulatory exception applies, the Department properly denied Taxpayers’ claim for

credit on their 2007 personal income tax. Aside from the adjustments that the Department agreed to

make before and after the hearing, Taxpayers’ protest is denied.

CONCLUSIONS OF LAW

A. Taxpayers filed a timely, written protest to the Department’s partial denial of claims

for credit on 2007, 2008, 2009, and 2010 personal income taxes. Jurisdiction lies over the parties

and the subject matter of this protest.

In the Matter of the Protest of Timothy and Teresa Martin, page 9 of 10
B. The Department properly allocated all of Taxpayers’ claims for credit using

Taxpayers’ allocation of income percentage determined under NMSA 1978, Section 7-2-11

(2001).

C. Taxpayers’ 2013 claim for credit on 2007 personal income tax was beyond the

statute of limitations under NMSA 1978, Section 7-2-12.1 (1990) and NMSA 1978, Section 7-1-26

(D) (1) (2007, before 2013 amendment).

For the foregoing reasons, with the exception of the Department’s adjustments, Taxpayers’

protest IS DENIED.

DATED: December 9, 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 Timothy and Teresa Martin, page 10 of 10