Could a privately employed New Mexico resident avoid 2008 income tax by claiming he earned no federal wages and was only a state citizen?

Plain-English summary

Stephen Fingado's private-company salary was taxable wage income, and his arguments about federal employee definitions, citizenship, and IRS information did not overcome the assessment. He also failed to prove that he fell below the federal filing threshold that New Mexico's filing rule referenced.

Fingado worked for CAPS Inc. and Tempur Production USA in Bernalillo County during 2008. He filed neither a federal nor a New Mexico return.

The Department identified two employer-reported income sources through information received electronically from the IRS and assessed $394.00 of personal income tax.

New Mexico did not need federal supervision to assess

Fingado argued that he had no federal tax liability and therefore New Mexico lacked a basis to tax him. The decision cited state sovereign taxing authority and held that New Mexico could assess and collect its own tax without federal supervision.

Employer records and his own testimony established wages

Fingado challenged the IRS-derived records as illegally disclosed and hearsay. The decision said the federal disclosure provision placed duties on the IRS and that the information came from his employers, leaving him without standing to assert their disclosure rights.

The Department stored the electronically received information in its ordinary course of business. The hearing officer found the records admissible or, at minimum, supported by Fingado's own testimony.

He admitted working for Tempur Production, receiving a salary paycheck, and having deductions for health benefits and Social Security. That evidence independently supported employee wage income.

“Includes” did not limit employees to government workers

Fingado read the Internal Revenue Code's employee definition as covering only the listed public officials, government workers, and corporate officers.

The decision applied Section 7701(c), under which “includes” and “including” do not exclude other things within the term's ordinary meaning. The list enlarged rather than limited “employee,” and privately employed wage earners remained covered.

State citizenship did not remove federal citizenship

The decision also rejected the claim that a person born in a state was only a citizen of that sovereign state and outside federal tax jurisdiction. It cited the Fourteenth Amendment's simultaneous United States and state citizenship and decisions describing such arguments as frivolous or without merit.

No proof supported the filing-threshold claim

Section 7-2-12 required a New Mexico return from a nonexempt resident or person earning New Mexico income who had to file federally.

Fingado asserted that his federal gross income was below the Section 6012 threshold. At the hearing, however, he said his no-liability position was procedural rather than based on his income amount and provided no evidence that he was not required to file.

Penalty was mandatory because he did not show a good-faith mistake of law on reasonable grounds or another nonnegligence factor. Interest accrued from the original due date until principal payment.

Result: protest DENIED. Fingado owed $394.00 tax, $78.80 penalty, and accrued interest. The original assessment listed $46.30 of interest, for an initial total of $519.10.

The first finding labels both $78.80 and $46.30 as “interest.” The final order expressly identifies $78.80 as penalty, showing that the first label is a clerical error.

What this means for you

Private-sector employees

The federal employee definition does not exclude private workers merely because it specifically lists public officials and government personnel.

Nonfilers disputing third-party income data

Challenge employer-reported amounts with records. A hearsay label alone did not defeat regularly maintained agency data that the taxpayer's own testimony corroborated.

Taxpayers claiming no federal filing duty

Provide evidence of income, filing status, and the applicable threshold. A procedural theory about tax jurisdiction did not establish that income was below the filing requirement.

Common questions

Q: Did New Mexico rely only on an IRS transcript?
A: No. Fingado's testimony about his employer, salary, and paycheck deductions also supported the wage finding.

Q: Did “employee” mean only a government employee?
A: No. The decision held that the statutory list was inclusive, not exclusive.

Q: Could Fingado avoid federal status by claiming only state citizenship?
A: No. The decision applied the Fourteenth Amendment and rejected that theory.

Q: Did he prove that no federal return was required?
A: No. He offered no evidence that his income fell below the applicable threshold.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-1-17(C), 7-1-67, and 7-1-69 — assessment presumption, interest, and penalty
• NMSA 1978, § 7-2-12 — New Mexico filing requirement
• 26 U.S.C. §§ 6103(d), 6012, 3401, and 7701(c) — state disclosure, filing, wages, employee, and inclusive definitions
• Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence and nonnegligence factors

Cases cited:

• Holt v. New Mexico Department of Taxation and Revenue, 2002-NMSC-034 — state taxing authority independent of federal supervision
• United States v. Latham, 754 F.2d 747 (7th Cir. 1985) — private wage earners within employee definition
• United States v. Ward, 833 F.2d 1538 (11th Cir. 1987) — federal-jurisdiction tax argument rejected
• Chavez v. City of Albuquerque, 1997-NMCA-111 — legal-residuum rule in administrative evidence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Stephen Fingado
• Decision PDF: D&O 14-12

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
STEPHEN R. FINGADO No. 14-12
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L 0169310528

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on October 31, 2013, before

Richard M. Jacquez, Esq., Tax Hearing Officer, in Santa Fe. Mr. Stephen R. Fingado

(“Taxpayer”) appeared pro se. Staff attorney Cordelia Friedman, represented the Taxation and

Revenue Department of the State of New Mexico (“Department”). Protest Auditor Mary Griego

appeared as a witness for the Department. Taxpayer Exhibits 1-1 through 1-6 were admitted into

the record. Department Exhibits A-G were admitted into the record. All exhibits are more

thoroughly described in the Administrative Protest Hearing Exhibit Log. On October 31, 2013,

Ms. Friedman filed a Submission of Additional Authority with a copy of Holt v. New Mexico

Department of Taxation & Revenue, 2002-NMSC-034, 133 N.M. 11, 59 P.3d 491. Based on the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On June 25, 2012, the Department assessed Taxpayer in personal income tax in

the amount of $394.00 in principal, $78.80 in interest and $46.30 in interest for tax year 2008.

[Letter id. no. L0169310528]

2. On July 14, 2012, Taxpayer protested the assessment for tax year 2008.

3. On August 9, 2012, the Department acknowledged Taxpayer’s protest. [Letter id.

no. L1263644992]

4. On August 5, 2013, the Department requested a hearing in this matter.

5. On August 7, 2013, the Hearings Bureau mailed a Notice of Administrative

Hearing setting the hearing for October 31, 2013.

6. On January 11, 2012, the Department sent Taxpayer a Notice of Limited Scope

Audit Commencement –2008 Unreported New Mexico Income. [Taxpayer Exhibit 1-2].

7. The Notice of Limited Scope Audit Commencement identified two income

sources for Taxpayer based on information provided to the Department by the Internal Revenue

Service (IRS). The income sources were from CAPS Inc. and Tempur Production USA, LLC.

8. On March 11, 2012, Taxpayer sent a Records Request to the Department

requesting copies of the information provided to the Department by the IRS as indicated in the

Notice of Limited Scope Audit Commencement. [Taxpayer Exhibit 1-2].

9. On March 14, 2012, the Department sent Taxpayer a Notice of Extension to

Provide Records and a Request for Additional Information. [Department Exhibit B-3 and B-2;

Taxpayer Exhibit 1-6].

10. On or about March 17, 2012, the Department requested copies of Taxpayer’s W-

2’s, 1099s and/or all other income source documents for tax year 2008. The Department also

advised Taxpayer that his Adjusted Gross Income, filing status and/or number of exemptions was

not consistent with his federal return per information provided to the Department by the IRS.

[Taxpayer Exhibit 1-6]

11. Taxpayer was employed by CAPS Inc. and Tempur Production USA, LLC for the

tax period at issue.

12. Taxpayer was employed in Bernalillo County, New Mexico for the tax period at

issue.

In the Matter of Stephen Fingado Page 2 of 12

13. Taxpayer was an employee for tax year 2008. He earned wage income from

CAPS Inc. and Tempur Production USA, LLC.

DISCUSSION

Burden of Proof

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

presumed to be correct. Consequently, Taxpayer has the burden to overcome the assessment of

personal income tax. See Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct.

App. 1972).

The first issue raised by Taxpayer is pursuant to NMSA 1978, Section 7-2-12 “residents

who are required to file federal income tax returns are required to file returns with the Department.”

Taxpayer argued that since he had not federal tax liability and was not required to file a federal

return for tax year 2008, he had no requirement to file a personal income tax return with the

Department for tax year 2008.

Department’s Authority to Determine Tax Liability

The first issue to address is the Department’s authority to determine Taxpayer’s tax

liability. In Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-34, ¶ 4, 133

N.M. 11, our State Supreme Court held, “As a general matter, the State of New Mexico has the

authority to assess and collect taxes without federal supervision.” See Dep't of Revenue v. Arthur,

153 Ariz. 1, 734 P.2d 98, 100 (Ct. App. 1986) ("The State of Arizona's power to tax is

independent of the Constitution of the United States."). In Arthur, the United States Supreme

Court expressed, “We have had frequent occasion to consider questions of state taxation in the

light of the Federal Constitution, and the scope and limits of National interference are well

settled. There is no general supervision on the part of the Nation over state taxation, and in

In the Matter of Stephen Fingado Page 3 of 12
respect to the latter the state has, speaking generally, the freedom of a sovereign both as to

objects and methods. Citing to Mich. Cent. R.R. Co. v. Powers, 201 U.S. 245, 292-93, 50 L. Ed.

744, 26 S. Ct. 459, (1906); accord Weed v. Comm'r of Revenue, 489 N.W.2d 525, 529 (Minn. Ct.

App. 1992) (relying on Powers, and holding, “The state need not rely on a constitutional

amendment for the power to tax. The states possess the powers of a sovereign.”). The Hearing

Officer is not persuaded by Taxpayer’s argument.

Evidence and Documents to Establish Income

Taxpayer argued that any evidence or documents obtained by the Department from the

IRS to establish his income was obtained illegally. 26 U.S.C. § 6103 (d) sets forth that any

information disclosed to a State agency must be made by a written request to the IRS. Taxpayer

requested such information and the Department responded stating such records would be held by

the IRS. Taxpayer argued that such a response supports his argument that the Department did

not formally request such information.

The Hearing Officer is not persuaded by Taxpayer’s argument. First, § 6103 places the

duty on the IRS to disclose information legally to State agencies. Taxpayer has indicated that he

did not file a Federal or State tax return for TY08. Any information provided by the IRS to the

Department would be information from provided by Taxpayer’s employer, not the Taxpayer.

Therefore, Taxpayer does not have standing to argue that the IRS disclosed information from his

employer in violation of § 6103.

Taxpayer argued that Department issued him a Notice of Assessment of Taxes and

Demand for Payment which Taxpayer claims to be based on false information. The Notice of

Assessment provides an “Explanation of Liability” which claims that the assessment arises from

a full review of your period(s) ending 12/31/2008 Personal Income Tax Return. Taxpayer

In the Matter of Stephen Fingado Page 4 of 12
argued that he never filed a Personal Income Tax Return for the period ending 12/31/2008, and

therefore the Notice of Assessment is false on its face.

Ms. Griego testified that the Department receives information from the IRS electronically

via computer and the information is stored electronically at the “date warehouse”. The

Department retains the information in its ordinary course of business. The Department is then

able to extract information that is needed based on the types of projects being conducted. Ms.

Griego testified that the Department had information regarding Taxpayer indicating that he had

two income sources for TY08. The Department sent Taxpayer copies of these documents as

requested pursuant to a public records request. (Taxpayer Exhibits 1-3 and 1-4). Taxpayer

questioned how the printout of a Tax Transcript from the IRS was dated “Request Date 3-28-13”

and “Response Date 3-28-13”, yet the Audit Commencement Letter was dated much earlier

(January 11, 2012). The Hearing Officer finds no issues with the dates. Ms. Griego explained

that information is stored electronically, and since Taxpayer requested copies of documents on

March 11, 2013, the Department requested the Account Transcript on March 28, 2013. There is

nothing in the record to suggest that the documents were available to the Department prior to

January 11, 2012, when the Limited Scope Audit Letter was mailed.

Taxpayer next argues that the documents relied upon to show his source of income is

hearsay. During an informal administrative hearing, the formal rules of evidence, including the

hearsay rules, do not strictly apply. Even if the hearsay rules did apply, the documents showing

income sources are copies of a regularly maintained business record of the Department, and as

such, would likely be a recognized exception to the hearsay rule under either the regularly

maintained business records exception or under the catch-all exception as having sufficient

indicia of reliability.

In the Matter of Stephen Fingado Page 5 of 12
The legal residuum rule requires that an agency’s administrative decision be “supported

by some evidence that would admissible under the rules” of evidence. Chavez v. City of

Albuquerque, 124 N.M. 239, 241, 1997 NMCA 111, 947 P.2d 1059, 1061 (N.M. Ct. App. 1997).

As the New Mexico Court of Appeals explained in Anaya v. New Mexico State Personal Board,

107 N.M. 622, 626, 762 P.2d 909, 913 (N.M. Ct. App 1988),

[t]he legal residuum rule does not require that all evidence
considered by the administrative agency be legally admissible
evidence, but only “that an administrative action be supported by
some evidence that would be admissible in a jury trial” Duke City
Lumbar Co. v. New Env’tl Improvement Bd., 101 N.M. at 295, 681
P.2d at 721.

As mentioned above, the exhibits would survive a hearsay objection as one of two possible

exceptions to the hearsay rules, and thus would be admissible in a jury trial, satisfying the Duke

City and Chavez standard. Furthermore, even if the documents would not survive a hearsay

objection, it is hardly the only piece of evidence supporting an administrative decision in this

case. Taxpayer testified that during TY08 he was employed by Tempur Production, a private

company within Bernalillo County, New Mexico. Taxpayer testified that his wages are

calculated as a salary, he received a pay check from his employer and that his employer deducts

a percentage of his salary from his paycheck to pay for health benefits and social security.

Taxpayer testified that for TY08 no money was withheld from his paycheck for taxes and he

could not recollect if he completed a W-4 form for TY08. The Hearing Officer is not persuaded

by Taxpayer’s argument. The documents showing income sources for the Taxpayer in TY08 are

admissible and can be used by the Department to determine his tax liability.

Taxpayer’s Income is Wages and Taxpayer is an Employee.

In the Matter of Stephen Fingado Page 6 of 12
Taxpayer argues he did not receive wages because he did not fit the definition of an

employee as set forth in § 3402 (c) of the IRC. § 3401 IRC defines “Wages” as follows:

(a) For purposed of this chapter, the term “wages” means
all remuneration (other than fees paid to a public official)
for services performed by an employee for his employer,
including the cash value of all remuneration (including
benefits) paid in any medium other than cash.

Taxpayer’s argument focuses on his claim that he does not fit the definition of an employee, and

since he is not an employee, he cannot receive wages. § 3402 IRC defines “Employee” as

follows:

(c) For the purpose of this chapter, the term “employee”
includes an officer, employee, or elected official of the
United States, a State, or any political subdivision thereof,
or the District of Columbia, or any agency or instrumentality
of any one or more of the foregoing. The term “employee”
also includes an officer of a corporation. (Emphasis added)

Taxpayer misreads § 3402 (c) believing that only the examples listed are employees. § 7701

IRC defines “includes and including” as follows:

(c) The term “includes” and “including” when used in a
definition contained in this title shall not be deemed
to exclude other things otherwise within the meaning
of the term defined.

Thus, the word “includes” as used in the definition of “employee” is a tern of

enlargement, not of limitation. It clearly makes federal employees and officials a part of the

definition of “employee,” which generally includes private citizens. See United States v.

Latham, 754 F.2d 747, 750 (7th Cir. 1985) (calling the instructions Latham wanted given to the

jury “inane,” the court said, “[the] instruction which indicated that under 26 U.S.C. § 3401(c) the

category of ‘employee’ does not include privately employed wage earners is a preposterous

reading of the statute. It is obvious within the context of [the law] the word ‘includes’ is a term

In the Matter of Stephen Fingado Page 7 of 12
of enlargement not of limitation, and the reference to certain entities or categories is not intended

to exclude all others...” Sullivan v. United States, 788 F.2d 813, 815 (1st Cir. 1986) (the court

rejected Sullivan's attempt to recover a civil penalty for filing a frivolous return, stating “to the

extent [he] argues that he received no ‘wages’... “because he was not an ‘employee’ within the

meaning of 26 U.S.C. § 3401(c), that contention is meritless. . . . The statute does not purport to

limit withholding to the persons listed therein.”) Peth v. Breitzmann, 611 F. Supp. 50, 53 (E.D.

Wis. 1985) (the court rejected the taxpayer's argument “that he is not an ‘employee’ under I.R.C.

§ 3401(c) because he is not a federal officer, employee, elected official, or corporate officer,”

stating, “[he] mistakenly assumes that this definition of ‘employee’ excludes all other wage

earners.” The Hearing Officer finds that Taxpayer is an employee and received wages.

Taxpayer is a citizen subject to Taxation.

Taxpayer argues that he is not a citizen subject to its jurisdiction, upon whom Congress

has the authority to impose a graduated income tax, as defined in 26 CFR Section 1.1-1 (c)

because he was born in one of the union American States and not a territory over which the

United States is sovereign. Taxpayer’s argument once again focuses on his contention that he

does not have any federal tax liability, which has already been addressed in this decision.

However, the Fourteenth Amendment to the United States Constitution defines the basis for

United States citizenship, stating that

“[a]ll persons born or naturalized in the United States,
and subject to the jurisdiction thereof, are citizens of
the United States and of the State wherein they reside.”

The Fourteenth Amendment therefore establishes simultaneous state and federal

citizenship. The claim that Taxpayer is not a citizen of the United States but instead is a citizen

of a sovereign state and not subject to federal taxation has been uniformly rejected by the courts.

In the Matter of Stephen Fingado Page 8 of 12
United States v. Ward, 833 F.2d 1538, 1539 (11th Cir. 1987), cert. denied, 485 U.S. 1022 (1988)

(the court found Ward's contention that he was not an “individual” located within the jurisdiction

of the United States to be “utterly without merit” and affirmed his conviction for tax evasion.

United States v. Sileven, 985 F.2d 962 (8th Cir. 1993) (the court rejected the argument that the

district court lacked jurisdiction because the taxpayer was not a federal citizen as “plainly

frivolous”. United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993) (the court rejected the

Gerads' contention that they were “not citizens of the United States, but rather ‘Free Citizens of

the Republic of Minnesota’ and, consequently, not subject to taxation” and imposed sanctions

“for bringing this frivolous appeal based on discredited, tax-protestor arguments.”

Requirement to File a Federal Return

Section 7-2-12 in its entirety states:

A. Every resident of this state and every individual deriving
income from any business transaction, property or employment within
this state and not exempt from tax under the Income Tax Act who is
required by the laws of the United States to file a federal income tax return
shall file a complete tax return with the department in form and content
as prescribed by the secretary.

In Taxpayer Exhibit 1-6, Taxpayer stated that he did not receive any federal gross income

above the threshold amount so as to trigger any requirement to file a federal income tax return

under 26 U.S.C. § 6012 for tax year 2008. Therefore, Taxpayer argues that he is not required to

file a New Mexico personal income tax return for tax year 2008. However, at the hearing

Taxpayer testified that the basis for not having any federal tax liability was procedural, and not

based on any amount of income. Taxpayer did not present any evidence to show that he is not

required to file a federal income tax turn.

Assessment of Interest

In the Matter of Stephen Fingado Page 9 of 12
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, Section 7-1-67 (2007). 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., ¶22, 32, 133. The statute also makes it clear that

interest begins to run from the original due date of the tax and continues until the tax principal is

paid in full. The Department has no discretion under NMSA 1978, § 7-1-67 (2007) and must assess

interest against Taxpayer from the time the tax was due but not paid until such time as the tax is

paid in full.

Assessment of Penalty

When a taxpayer fails to pay taxes due to the State because of negligence or disregard of

rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2007) requires that

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. (italics
added for emphasis)

As discussed above, the statute’s use of the word “shall” makes the imposition of penalty

mandatory in all instances where a taxpayer’s actions or inactions meets the legal definition of

“negligence” even if a taxpayer’s actions or inactions were unintentional. In instances where a

taxpayer might otherwise fall under the definition of civil negligence subject to penalty, NMSA

1978, § 7-1-69 (B) (2007) provides a limited exception: “No penalty shall be assessed against a

taxpayer if the failure to pay an amount of tax when due results from a mistake of law made in

good faith and on reasonable grounds.”

In the Matter of Stephen Fingado Page 10 of 12
Regulation 3.1.11.10 NMAC (1/15/01) defines negligence in three separate ways: (A)

“failure to exercise that degree of ordinary business care and prudence which reasonable taxpayers

would exercise under like circumstances;” (B) “inaction by taxpayer where action is required”; or

(C) “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

Inadvertent error meets the legal definition of “negligence” under the penalty statute. See El Centro

Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 799, 779 P.2d 982, 986

(Ct. App. 1989).

Taxpayer did not show that the failure to pay personal income tax for tax year 2008

resulted from a good faith mistake of law on reasonable grounds under NMSA 1978, § 7-1-69 (B)

(2007). Taxpayer also did not establish any of the non-negligence factors under Regulation

3.1.11.11 NMAC (01/15/01) that might allow the abatement of penalty. Consequently, the

Department must assess civil penalty under NMSA 1978, § 7-1-69 (2007).

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest of the assessment for 2008 personal income

taxes, penalty, and interest, and jurisdiction lies over the parties and the subject matter of this

protest.

B. Taxpayer did not present sufficient evidence to overcome the presumption of

correctness under NMSA 1978, §7-1-17 (2007). See Archuleta v. O'Cheskey, 84 N.M. 428, 431,

504 P.2d 638, 641 (NM Ct. App. 1972).

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

payment of $394.00 in personal income tax, $78.80, in penalty, and any accrued interest until the

tax principal is satisfied under NMSA 1978, Section 7-1-67 (2007).

DATED: April 14, 2014

In the Matter of Stephen Fingado Page 11 of 12
Richard M. Jacquez
Richard M. Jacquez, Esq.
Tax 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 parties 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. Either party filing an appeal

shall file a courtesy copy of the appeal with Hearings Bureau contemporaneous with the Court of

Appeals filing.

In the Matter of Stephen Fingado Page 12 of 12