Did New Mexico's income-tax exemption for active-duty armed-forces pay cover a Public Health Service officer's salary?

Plain-English summary

Rochelle Young's Public Health Service salary did not qualify for New Mexico's active-duty armed-forces income-tax exemption. The federal definition of “armed forces” did not include the PHS, and Young did not prove that she had been detailed to the Army or Navy.

Young was a PHS officer during 2011 and 2012. She claimed that her pay was exempt under Section 7-2-5.11, which covered salary paid by the United States for active-duty service in the armed forces.

The statute used the narrower term “armed forces”

The decision looked to 10 U.S.C. § 101(a)(4), which defined the armed forces as the Army, Navy, Air Force, Marine Corps, and Coast Guard. That list did not include the PHS.

Congress separately defined the broader term “uniformed services” in subsection (a)(5). That definition listed the armed forces, the commissioned corps of the National Oceanic and Atmospheric Administration, and the commissioned corps of the PHS as distinct components.

Because the New Mexico Legislature chose “armed forces” rather than “uniformed services,” the decision refused to add PHS officers to the state exemption. Tax exemptions also had to be strictly construed, and Young had the burden to establish her entitlement.

The residency regulation did not change the result

Young relied on Regulation 3.3.1.9(D)(5), whose definition of armed forces included PHS officers detailed by proper authority to the Army or Navy.

The decision gave two reasons that provision did not help her. First, the definition applied only to that regulation's residency rules, and residency was not disputed. Second, even if the definition reached the exemption, there was no evidence that Young had been detailed to either the Army or Navy.

Penalty and interest remained

The Department's 2011 and 2012 PIT-ADJ instructions expressly said that PHS pay did not qualify for the exemption. The decision treated Young's claim in the face of those instructions as inattention and lack of ordinary care, supporting civil-negligence penalty.

Interest was mandatory until the tax was paid.

Result: protest DENIED. As of the hearing, Young owed:

• 2011: $1,812.00 tax, $362.40 penalty, and $119.04 interest.
• 2012: $3,182.00 tax, $636.40 penalty, and $114.29 interest.

Together, those hearing-date balances were $4,994.00 tax, $998.80 penalty, and $233.33 interest.

What this means for you

Public Health Service officers

Under the law applied in this 2014 decision, PHS membership alone did not make salary exempt as active-duty armed-forces pay. The decision distinguished the federal terms “armed forces” and “uniformed services.”

PHS officers detailed to another service

The residency regulation cited in the case referred only to PHS officers properly detailed to the Army or Navy. Documentation of a qualifying detail would therefore matter even when that regulation is relevant, but this decision did not hold that such a detail necessarily establishes the separate statutory income-tax exemption.

Taxpayers claiming an exemption

The taxpayer bears the burden to establish a tax exemption clearly. Check the statute's exact wording and the tax-form instructions before excluding income.

Common questions

Q: Is the Public Health Service a uniformed service?
A: Yes. The decision quoted 10 U.S.C. § 101(a)(5), which included the PHS commissioned corps within “uniformed services.”

Q: Why did that not make PHS pay exempt?
A: New Mexico's statute used “armed forces,” and the cited federal definition of that narrower term did not include the PHS.

Q: Did the decision say Young was not on active duty?
A: No. It said the decisive question was whether she served in the “armed forces,” not the meaning of “active duty.”

Q: Could the residency regulation create the exemption?
A: No on these facts. The decision said that regulation applied to residency and that Young also had not shown an Army or Navy detail.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-3, 7-2-5.11, and 7-2-12 — resident income tax, armed-forces salary exemption, and filing duty
• NMSA 1978, §§ 7-1-17 and 7-1-3 — assessment presumption and definition of tax
• NMSA 1978, §§ 7-1-67 and 7-1-69 — mandatory interest and civil-negligence penalty
• 10 U.S.C. § 101(a)(4)-(5) — armed forces and uniformed services definitions
• Regulations 3.3.1.9(D)(5) and 3.1.11.10 NMAC — residency definition and negligence

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024 — strict construction of exemptions and taxpayer's burden
• Wood v. State Educational Retirement Board, 2011-NMCA-020 — plain-meaning rule
• Johnson v. New Mexico Oil Conservation Commission, 1999-NMSC-021 — courts should not add words to a plain statute
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory statutory language

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Rochelle B. Young
• Decision PDF: D&O 14-30

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
ROCHELLE B. YOUNG No. 14-30
TO ASSESSMENTS ISSUED UNDER LETTER
ID NOs. L1866622416 and L0524445136

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on June 26, 2014 before Brian

VanDenzen, Esq., Hearing Officer, in Santa Fe. Enrolled Agent Daryl A. McDowell appeared

for Rochelle B. Young (“Taxpayer”). Staff Attorney Peter Breen appeared representing the State

of New Mexico, Taxation and Revenue Department (“Department”). Protest Auditor Milagros

Bernardo appeared as a witness for the Department. Taxpayer Exhibits 1-3 and Department

Exhibits A-D were admitted into the record, as described in the Administrative Exhibit Log.

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

FOLLOWS:

FINDINGS OF FACT

1. On January 8, 2014, the Department assessed Taxpayer $1,812.00 in personal

income tax principal, $362.40 in penalty, and $92.99 in interest for a total assessment of

$2,267.39 for the reporting period ending December 31, 2011. [Letter id. no. L1866622416].

2. On January 8, 2014, the Department assessed Taxpayer $3,182.00 in personal

income tax principal, $572.76 in penalty, and $68.51 in interest for a total assessment of

$3,823.27 for the reporting period ending December 31, 2012. [Letter id. no. L0524445136].

3. On February 26, 2014, Taxpayer timely protested both assessments.

4. On April 22, 2014, the Department requested a hearing in this matter.

5. On April 23, 2014, the Hearings Bureau issued Notice of Administrative Hearing,

scheduling this matter for May 7, 2014.

6. On May 6, 2014, Taxpayer moved to continue the scheduled hearing.

7. On May 6, 2014, the Department opposed Taxpayer’s request for continuance

given the late filing of the motion.

8. On May 7, 2014, the Department appeared for the scheduled hearing. Taxpayer

did not appear for the hearing. This hearing was set and occurred within 90-days of protest.

9. On May 7, 2014, over the Department’s objection, a Continuance Order and

Amended Notice of Administrative Hearing was issued, rescheduling this matter for a hearing on

June 26, 2014 at 9:00 a.m. That order warned that future continuances were unlikely.

10. On June 26, 2014, Taxpayer again moved to continue the scheduled hearing due

to Taxpayer’s representative’s flight troubles. At 9:00 a.m., the hearing went on the record

telephonically to check on Taxpayer’s representative’s status and at what time he could appear.

While Taxpayer proposed resetting until the following day, the matter could not be rescheduled

the following day because of another scheduled hearing. The matter went into recess until 1:00

p.m. later that day.

11. During the relevant period, tax years 2011 and 2012, Taxpayer was an officer for

the Public Health Service (“PHS”). [Taxpayers Ex. #3].

12. There is no evidence on the record whether Taxpayer as a PHS officer was

detailed by proper authority for duty either with the army or the navy.

13. As a member of PHS, Taxpayer claimed an exemption from New Mexico income

tax under NMSA 1978, Section 7-2-5.11 (2007) in both years.

In the Matter of the Protest of Rochelle B. Young, page 2 of 11

14. In 2010, the Department’s “Instructions for PIT-ADJ Schedule of Additions and

Deductions/Exemptions” stated that pay from members of “active duty military service in the

armed forces of the United States” may be listed on line 15 of the PIT-ADJ and may be

exempted from state income tax. The Department’s instructions further indicated that “armed

forces” includes the Army, Navy, Air Force, Marine Corps, and Coast Guard. [Department Ex.

B].

15. In addition to the instruction identified in FOF #14, in its 2011 and 2012

“Instructions for PIT-ADJ Schedule of Additions and Deductions/Exemptions” the Department

added an express instruction that the “[p]ay, wages or salaries paid by the U.S. Public Health

Services does not qualify for the exemption.” [Department Ex. C & D].

16. As of the date of hearing, for the personal income tax year ending on December

31, 2011, Taxpayer owed $1,812.00 in personal income tax, $362.40 in penalty, and $119.04 in

interest. [Department Ex. A].

17. As of the date of hearing, for the personal income tax year ending on December

31, 2012, Taxpayer owed $3,182.00 in personal income tax, $636.40 in civil penalty, and

$114.29 in interest. [Department Ex. A].

DISCUSSION

There is one issue at protest: As an officer of the PHS, was Taxpayer entitled to her

claimed exemption under NMSA 1978, Section 7-2-5.11 (2007) from New Mexico personal

income tax in 2011 and 2012.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessments of tax issued in this case

are presumed correct. Unless otherwise specified, for the purposes of the Tax Administration Act,

“tax” is defined to include interest and civil penalty. See NMSA 1978, §7-1-3 (X) (2013).Under

In the Matter of the Protest of Rochelle B. Young, page 3 of 11
Regulation 3.1.6.13 NMAC, the presumption of correctness under Section 7-1-17 (C) extends to

the Department’s assessment of penalty and 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). Taxpayer has the burden to

overcome the assessments. See Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431.

Moreover, “[w]here 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.

Payment of New Mexico personal income tax is governed by NMSA 1978, §§ 7-2-1 to

36. Unless otherwise exempted by law, a tax is imposed “upon the net income of every” New

Mexico resident. NMSA 1978, § 7-2-3 (1981). NMSA 1978, Section 7-2-12 (2003) requires any

resident or any person deriving income from New Mexico to file a state income tax return. There

is no genuine dispute—or contrary evidence—that Taxpayer was a New Mexico resident during

tax years 2011 and 2012. Therefore, unless otherwise exempted or deductible, Taxpayer’s

income was subject to New Mexico personal income tax in 2011 and 2012.

Taxpayer claimed an exemption from New Mexico personal income tax under Section 7-

2-5.11. Under Section 7-2-5.11, “[a] salary paid by the United States to a taxpayer for active duty

service in the armed forces of the United States is exempt from state income taxation.” (emphasis

added). Taxpayer’s argument focused largely on the phrase “active duty,” but the crux of the

exemption is not that phrase but rather what constitutes “armed forces of the United States.”

In the Matter of the Protest of Rochelle B. Young, page 4 of 11
While Taxpayer’s representative repeatedly suggested that the Department had no federal

authority to support its exclusion of PHS members from the exemption, federal law in fact

provides the operative definition for “armed forces of the United States.” Title 10 of the United

States Code contains the Armed Forces law of the United States, and begins with Subtitle A, the

General Military Law of the United States. Under the definitional section of the General Military

Law of the United States, 10 U.S.C. § 101(a) (4) (2013), “armed forces” means “the Army,

Navy, Air Force, Marine Corps, and Coast Guard.” PHS members are not included in the federal

definition of armed forces under 10 U.S.C. § 101(a)(4). Under 10 U.S.C. § 101(a) (5), Congress

addressed the broader concept of “uniformed services”, and in so doing, listed armed forces

distinctly from the PHS. Specifically, 10 U.S.C. § 101(a) (5) reads

[t]he term “uniformed services” means—
(A) the armed forces;
(B) the commissioned corps of the National Oceanic and
Atmospheric Administration; and
(C) the commissioned corps of the Public Health Service.

By not including PHS in the specific definition of “armed forces” under 10 U.S.C. § 101(a) (4),

and by separately and distinctly listing PHS members from members of the armed forces in the

definition of the broader term “uniformed services” under 10 U.S.C. § 101(a) (5), Congress did

not intend PHS members to be included in the definition of armed forces.

There is no doubt that members of PHS provide a valuable public service. However, that

fact of worthy service does not establish that PHS members are legally eligible for the Section 7-

2-5.11 exemption. Again, under Wing Pawn Shop, ¶16, exemptions from taxation must be

narrowly and strictly construed and a taxpayer must clearly establish the right to such exemption.

Questions of statutory construction begin with the plain meaning rule. See Wood v. State Educ.

Ret. Bd., 2011-NMCA-20, ¶12. In Wood, ¶12 (internal quotations and citations omitted),

In the Matter of the Protest of Rochelle B. Young, page 5 of 11
the Court of Appeals stated that

the guiding principle in statutory construction requires that we look
to the wording of the statute and attempt to apply the plain
meaning rule, recognizing that when a statute contains language
which is clear and unambiguous, we must give effect to that
language and refrain from further statutory interpretation.

Extra words should not be read into a statute if the statute is plain on its face, especially if it

makes sense as written. See Johnson v. N.M. Oil Conservation Comm'n, 1999-NMSC-21, ¶ 27,

127 N.M. 120.

Under Section 7-2-5.11, the New Mexico Legislature used the phrase “armed forces of

the United States,” which as discussed, has a federal law definition under 10 U.S.C. § 101(a) (4).

The New Mexico Legislature could have chosen the broader term “uniformed services,” which

would have included PHS members as defined by 10 U.S.C. § 101(a) (5). Instead, the Legislature

chose the narrower phrase “armed forces.” Given the New Mexico’s Legislature’s use of “armed

forces of the United States” rather than the “uniformed services of the United States”, and the

distinct definition for armed forces under 10 U.S.C. § 101(a) (4) that does not include the PHS,

Taxpayer has not established her right as a member of the PHS to claim the Section 7-2-5.11

exemption.

Consistent with this federal definition of “armed forces” and the New Mexico

Legislature’s use of that phrase under Section 7-2-5.11, in all of its “Instructions for PIT-ADJ

Schedule of Additions and Deductions/Exemptions” for the relevant period, the Department

informed taxpayers that armed forces included the Army, Navy, Air Force, Marine Corps, and

Coast Guard. The Department’s instructions also specifically informed Taxpayer that members

of PHS do not qualify for the exemption under Section 7-2-5.11.

In the Matter of the Protest of Rochelle B. Young, page 6 of 11
Taxpayer argues that Regulation 3.3.1.9 (D) (5) NMAC establishes that PHS members

are part of the armed forces for the purposes of New Mexico personal income tax. Regulation

3.3.1.9 NMAC is entitled “Residency.” Regulation 3.3.1.9 (D) (5) NMAC specifically reads that

[f]or purposes of this section, "armed forces" means all members
of the army of the United States, the United States navy, the
marine corps, the air force, the coast guard, all officers of the
public health service detailed by proper authority for duty either
with the army or the navy, reservists placed on active duty, and
members of the national guard called to active federal duty.

However, there are two basic reasons why this regulation does not apply to Taxpayer’s claim for

exemption under Section 7-2-5.11. First, by the very language of Regulation 3.3.1.9 (D) (5)

NMAC, that definition only applies to that specific regulatory section addressing residency.

Residency is not at issue in this case. There is no evidence that the basis of Taxpayer’s residency

in New Mexico in this matter comes from the Regulation 3.3.1.9 (D) NMAC’s prohibition on

determining residency solely based on presence in New Mexico under military orders, which is

the purpose of that regulatory section. Secondly, even if that section arguably did apply beyond a

question of residency, Taxpayer did not establish under Regulation 3.3.1.9 (D) (5) NMAC that

she was “detailed by proper authority for duty either with the army or the navy.” The Department

cites the United States Coast Guard Board of Review case, US v. Braud, 28 C.M.R. 692, 159

CMR LEXIS 214, for the same principle.

The remaining authority cited by Taxpayer was of limited value. Taxpayer tendered a

personnel manual of the Department of Health and Human Services addressing withholding tax,

residency, and the Soldier’s and Sailor’s Civil Relief Act of 1940 (now called the

Servicemembers Civil Relief Act). However, the United States Code has far more authoritative

value than a DHS personnel manual. The United States Code is federal law. And the issue in this

matter is not one of withholding tax, residency, or compliance with the Servicemembers Civil

In the Matter of the Protest of Rochelle B. Young, page 7 of 11
Relief Act as discussed in the manual1. The fact that PHS members are expressly covered under

the Servicemembers Civil Relief Act does not mean that PHS members are members of the

armed forces for all federal purposes, especially in light of the clear definition of “armed forces”

under 10 U.S.C. § 101 (a) (4) (2013), the General Military Law of the United States.

Taxpayer’s representative’s claim—presented without any supporting authority—that it is

commonly held wisdom that the Department of Defense’s includes PHS members in its

definition of “active duty, armed forces”, does not alter the federal definition of “armed forces”

under 10 U.S.C. § 101 (a) (4) (2013). Regardless of commonly held wisdom regarding PHS

within the Department of Defense, the Department of Defense is governed by the United States

Code, in particular the General Military Law of the United States articled in Title 10. Taxpayer

provided no authority to support its argument about various withholding compacts. Moreover,

despite Taxpayer’s arguments, the Department was not arbitrary or discriminatory because it was

applying the federal definition of armed forces under 10 U.S.C. § 101 (a) (4) (2013).

In summary of the exemption issue, the Department relied on federal law’s definition of

“armed forces” under 10 U.S.C. § 101 (a) (4) (2013) in determining that Taxpayer as an officer

in the PHS did not meet the statutory requirements for an exemption under Section 7-2-5.11.

Under the Wing Pawn Shop, ¶16, standard where the exemption under Section 7-2-5.11 must be

narrowly construed, Taxpayer was unable to establish a right to an exemption under Section 7-2-

5.11.

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 (2013) (italics for emphasis). Under the statute, the

1
Under Regulation 3.3.1.9 (D) NMAC, New Mexico in fact complies with the requirement of Servicemembers Civil
Relief Act that residency/domicile cannot come solely from a member of the military’s presence in New Mexico
under orders.

In the Matter of the Protest of Rochelle B. Young, page 8 of 11
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. Further, 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, by its use of the word “shall”, Section 7-1-69 requires that civil

penalty be added to the assessment. Here, Taxpayer was civilly negligent in light of the 2011 and

2012 “Instructions for PIT-ADJ Schedule of Additions and Deductions/Exemptions” that

unambiguously stated that PHS members did not qualify for the claimed exemption. See

Regulation 3.1.11.10 NMAC (defining negligence to include inattention and failure to exercise

ordinary care and prudence). Taxpayers’ protest is denied.

CONCLUSIONS OF LAW

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

parties and the subject matter of this protest. The hearing was timely set in compliance with NMSA

1978, Section 7-1-24.1 (A) (2013).

B. Under NMSA 1978, Section 7-2-3 (1981), Taxpayer was a New Mexico resident

subject to New Mexico personal income tax in 2011 and 2012.

C. Taxpayer was not entitled to claim an exemption of her PHS income because the

Section 7-2-5.11 exemption only applies to members of “armed forces of the United States” Under

federal law, 10 U.S.C. § 101 (a) (4) (2013), “armed forces of the United States.” means only the

Army, Navy, Air Force, Marine Corps, and Coast Guard.

D. Regulation 3.3.1.9 (D) (5) NMAC does not apply to Taxpayer’s claim for the

exemption because there is no issue of residency in this case and because Taxpayer did not

In the Matter of the Protest of Rochelle B. Young, page 9 of 11
present evidence that she as a PHS officer was detailed by proper authority for duty either with

the army or the navy.

E. Under NMSA 1978, Section 7-1-67 (2013)’s mandatory shall language, Taxpayer

is liable for accrued interest under the assessments. . See Marbob Energy Corp. v. N.M. Oil

Conservation Comm'n, 2009-NMSC-013, ¶22, 146 N.M. 24.

F. Under NMSA 1978, Section 7-1-69 (2007), Taxpayer is liable for civil negligence

penalty because Taxpayer’s inattention and lack of prudence in the fact of clear contrary

instructions satisfied Regulation 3.1.11.10 NMAC’s definition of civil negligence.

For the foregoing reasons, Taxpayers’ protest IS DENIED. As of the date of hearing, for the

personal income tax year ending on December 31, 2011, Taxpayer owed $1,812.00 in personal

income tax, $362.40 in penalty, and $119.04 in interest. For the personal income tax year ending on

December 31, 2012, Taxpayer owed $3,182.00 in personal income tax, $636.40 in civil penalty, and

$114.29 in interest.

DATED: July 25, 2014.

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

In the Matter of the Protest of Rochelle B. Young, page 10 of 11
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 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 Rule 12-601 NMRA. 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 the Hearing Bureau contemporaneous with the Court of Appeals filing so that the

Hearing Bureau can begin to prepare the record proper.

In the Matter of the Protest of Rochelle B. Young, page 11 of 11