Did paying more than 90% of Elizabeth Brower's 2014 income tax by January 2015 eliminate the penalty for short estimated installments earlier in the year?

Plain-English summary

Elizabeth Brower's timely but unequal 2014 estimated-tax payments produced a $22.35 underpayment penalty because the first three cumulative installments fell below the required percentages. Paying more than 90% of the final liability by January ended the penalty period but did not remove the earlier shortfalls.

Brower received most of her retirement distributions in December, did not have tax withheld, and expected income to decline. She paid $800 in April, $400 in June, $700 in September, and $2,200 in January, then paid the remaining $131 with her return in March 2015.

Her total 2014 tax was $4,231. The $4,100 paid as estimates by January exceeded 90% of that amount, but it was below 100% of her $4,423 liability for 2013.

The early cumulative percentages still mattered

Section 7-2-12.2 defined the required annual payment as the lesser of 90% of current-year tax or 100% of prior-year tax and set four installment dates.

The AHO read the statute to require cumulative payments reaching 25% in April, 50% in June, 75% in September, and the required annual amount by January. Brower's first three cumulative payments fell short of those levels even though every payment was made on time and rationally tracked income received.

Federal Form 2210 did not substitute for New Mexico rules

Brower used an annualized-income approach shown on federal Form 2210. The AHO found that New Mexico independently imposed its income tax and that the federal form was not referenced in the New Mexico statute.

She should have used New Mexico Form RPD-41272 to calculate the state underpayment. Her reasonable federal methodology did not overcome the Department's application of Section 7-2-12.2.

Final payment stopped—but did not retroactively cancel—the penalty

Brower had paid the required annual amount by January 2015. The AHO therefore limited the penalty to the period beginning with the April underpayment and ending when her January payment brought her into compliance.

It found no fraud or intent to evade tax, but her erroneous understanding did not overcome the assessment presumption or establish the statutory non-negligence ground.

Result: protest DENIED. The $22.35 estimated-tax penalty remained. All 2014 tax had been paid, and no interest was assessed or due.

The extracted decision contains two apparent year slips: findings 16 and 31 refer to January 2014 even though the payment sequence and conclusions identify January 2015 as the final estimated-payment period. This page follows the internally consistent 2015 timeline and preserves the original wording below.

What this means for you

Retirees with year-end distributions

Large December income does not necessarily eliminate earlier state installment requirements. Consider withholding or a state-approved annualization method before relying on a federal calculation.

Taxpayers using federal worksheets

Verify that the state statute or form adopts the same method. A federal safe harbor or worksheet may not control the state's estimated-tax schedule.

Taxpayers who catch up by the final installment

Catching up can stop further underpayment charges without erasing penalties already generated during earlier deficient installment periods.

Common questions

Q: Were Brower's payments late?
A: No. The installment payments were timely, but the early amounts were too small under the cumulative-percentage method.

Q: How much estimated tax did she pay by January?
A: $4,100, more than 90% of her $4,231 final 2014 liability.

Q: Why did federal Form 2210 not control?
A: New Mexico had independent statutory requirements and did not adopt that federal form as a substitute.

Q: Was any principal tax still due?
A: No. She paid the remaining $131 with the return.

Q: What did the AHO uphold?
A: Only the $22.35 estimated-tax underpayment penalty; no interest was due.

Citations and references

Statutes:

• NMSA 1978, § 7-2-12.2 — required annual payment, installment schedule, penalty, and exceptions
• NMSA 1978, § 7-1-17 — assessment presumption
• NMSA 1978, § 7-1-67(B) — formula used for the underpayment period

Cases cited:

• Holt v. New Mexico Department of Taxation and Revenue, 2002-NMSC-034 — New Mexico's independent authority to assess and collect income tax
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127 — duty to determine possible tax consequences and erroneous belief
• Regents of the University of New Mexico v. New Mexico Federation of Teachers, 1998-NMSC-020 — read statutory provisions to give the whole enactment effect

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Elizabeth O. Brower
• Decision PDF: D&O 16-09

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
ELIZABETH O. BROWER, No. 16- 09
TO THE ASSESSMENT ISSUED UNDER
LETTER ID NO. L 14751533968

DECISION AND ORDER

A formal hearing on the above-referenced protest was held on January 29, 2016, before

Hearing Officer Ignacio V. Gallegos. The Taxation and Revenue Department (Department) was

represented by Ms. Elena Morgan, Staff Attorney. Ms. Veronica Galewaler, Auditor, also

appeared on behalf of the Department. Ms. Elizabeth O. Brower (Taxpayer) appeared for the

hearing and represented herself. The Hearing Officer took notice of all documents in the

administrative file. Department Exhibits A1-A8 (Taxpayer’s 2014 PIT-1, 2014 PIT-ADJ, 2014

PIT-RC, 2014 Calculation of Estimated Person Income Tax Underpayment Penalty, 2014 1099-

R, and 2014 1099-R), Exhibit B (April 2014 estimated tax payment), Exhibit C (June 2014

estimated tax payment), Exhibit D (September 2014 estimated tax payment), Exhibit E (January

2015 estimated tax payment), Exhibit F (March 2015 payment), Exhibit H (Payment summary

worksheet), Exhibit G (Balance due) are admitted into the record. Taxpayer’s Exhibits 1A and

1B (Letter response from Department, dated November 12, 2015), Exhibit 2A and 2B (Letter

from Taxpayer to Ms. Galewater, dated November 23, 2015), Exhibit 3A and 3B (Federal IRS

form 2210) are admitted into the record. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

In the Matter of the protest of Elizabeth O. Brower, page 1 of 13
FINDINGS OF FACT

1. On July 31, 2015, the Department formally assessed the Taxpayer for the $22.35 penalty

for underpayment of estimated tax for the 2014 tax year. [L1475153968]

2. On October 7, 2015, the Taxpayer filed a formal protest letter.

3. On December 4, 2015, the Department filed a Request for Hearing asking that the

Taxpayer’s protest be scheduled for a formal administrative hearing.

4. A notice was issued on December 7, 2015, which set the hearing for January 29, 2016.

The hearing was set within 90 days of the protest.

5. In 2014, the Taxpayer was required to make estimated payments of her personal income

tax before March 31, 2014.

6. For 2014 estimated tax payments, the Taxpayer paid $800.00 in April of 2014, $400.00 in

June of 2014, $700.00 in September of 2014, and $2,200.00 in January of 2015.

7. Taxpayer filed her return and paid $131.00, the balance of the 2014 tax due, in March of

2015.

8. The Taxpayer receives the bulk of her retirement distributions in December of each year.

9. The Taxpayer’s retirement income has had the tendency to decline from year to year.

10. The Taxpayer does not have taxes withheld from her income distributions.

11. The Taxpayer owed $4,423.00 in personal income taxes for the 2013 tax year.

12. If Taxpayer had elected to pay 100% of the 2013 tax liability as estimated payments of

the 2014 tax liability, equal installments of estimated tax in the amounts of $1,105.75,

would have covered 100% of her tax liability for the previous year by the due date of

January 15, 2015.

In the Matter of the Protest of Elizabeth O. Brower, page 2 of 13

13. Taxpayer did not know what her income would be in 2014, or if she would receive

distributions in a manner similar to her 2013 tax year.

14. Taxpayer paid a total of $4,100.00 in 2014 estimated tax payments, of her total 2014

liability of $4,231.00.

15. The total estimated 2014 tax paid by January 15, 2015 was more than 90% of the total tax

due for tax year 2014.

16. The total estimated 2014 tax paid by January 15, 2014 was less than 100% of the total tax

due for tax year 2013.

17. The installments of estimated tax payments were not paid in equal sums.

18. The installments of estimated tax payments were paid timely.

19. Taxpayer is not a farmer or a rancher.

20. Taxpayer provided Internal Revenue Service (IRS) form 2210, to show how she

estimated her federal 2014 tax due, which she relied upon in estimating her New Mexico

tax liability.

21. The estimated annualized income from the first three installment periods would have

resulted in significantly reduced tax liability for 2014.

22. Payments of installment amounts were rationally related to Taxpayer’s actual income

received in the respective time periods.

23. Payments of unequal installment amounts were not intended to evade or defeat a tax.

24. The time periods themselves are not equal in duration. The first installment is due April

15 – a period of three months from the previous due date. The second installment is due

June 15 – a period of two months from the previous due date. The third installment is

due September 15 – a period of three months from the previous due date. The fourth

In the Matter of the Protest of Elizabeth O. Brower, page 3 of 13
installment is due January 15 of the next year – a period of four months from the previous

due date.

25. Taxpayer did not pay installments of estimated tax payments of equal sums in tax year

2013.

26. The Department did not assess penalty in 2013.

27. The Department’s rationale for not assessing penalties in 2013 was because the first

installment was greater than 25% of the total yearly tax due; the second installment,

although smaller, and the first installment added up to more than 50% of the yearly tax

due; the third installment, in addition to the second and first installments added up to

more than 75% of the yearly tax due; and the four combined installments added up to

either 100% of 2012 tax due or 90% of 2013 tax due.

28. The Department did assess a penalty in 2014.

29. The Department’s rationale for assessing penalties in 2014 was because the first

installment of $800.00 added up to less than 25% of the total estimated 2014 tax due,

based on the 2013 tax year; the second installment of $400.00 added to the first

installment, accounted for less than 50% of the total estimated 2014 tax due; the third

installment of $700.00 added to the previous installments added up to less than 75% of

the total estimated 2014 tax due.

30. The assessment of penalty was for underpayment of estimated 2014 tax payment

installments due between April 15, 2014, the date the first installment of estimated tax

was due, and January 13, 2015, the date when the tax liability was caught up to greater

than 90% of 2014 actual tax due.

In the Matter of the Protest of Elizabeth O. Brower, page 4 of 13

31. The penalty was charged for underpayment amounts from the time of the first

underpayment April 2014, through the time of payment of the final estimated payment on

January 13, 2014.

32. No tax was due at the time of the hearing, as the entire amount of 2014 tax due was paid

on or before April 15, 2015.

33. No interest was assessed or due.

34. The current penalty assessed by the Department for 2014 is $22.35.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for penalty for the

underpayment of estimated tax due for the 2014 tax year, due to unequal payments that do not

add up to pre-payments of 25%, 50%, 75% of the total required annual payment for the first

three installment deadlines. The issue may be divided into two sub-issues in this protest: first,

whether equal installments are required when “required annual payment” is based on 90% of the

current tax year tax liability, and second, if so, whether the underpayment penalty under NMSA

1978, Section 7-2-12.2 (G) or the civil negligence penalty under NMSA 1978, Section 7-1-69

(2007) must be abated because of full payment of the required annual payment by January 15 of

the year following the tax year, Taxpayer’s rational basis for payment of unequal installments

based on actual income received, annualized, and other alleged grounds establishing non-

negligence under Regulation 3.1.11.11 (A) NMAC.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

In the Matter of the Protest of Elizabeth O. Brower, page 5 of 13
7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be correct,

and it is the Taxpayer’s burden to present evidence and legal argument to show that the penalty

was improperly imposed or that she is entitled to an abatement of penalty.

Estimated Tax.

Taxpayers are required to make “the required annual payment in installments through

either withholding or estimated tax payments.” NMSA 1978, § 7-2-12.2 (A) (2011). The

required annual payment is either 90% of the current taxable year or 100% of the prior tax year,

whichever is less. See NMSA 1978, § 7-2-12.2 (B). Estimated payment installments are to be

made by the 15th days of April, June, and September of the taxable year, and by the 15th day of

January of the following year. See NMSA 1978, § 7-2-12.2 (D).

It is the position of the Department that the estimated tax payments should be made in

equal dollar amounts, based on the statute NMSA 1978 Section 7-2-12.2 (C) that requires:

There shall be four required installments for each taxable year. If a taxpayer is not liable

for estimated tax payments on March 31 but becomes liable for estimated tax at some

point after March 31, the taxpayer must make estimated tax payments as follows:

(1) if the taxpayer becomes required to pay estimated tax after March 31 and

before June 1 fifty percent of the required annual payment must be paid on or

before June 15, twenty-five percent of September 15 and twenty-five percent

on or before January 15 of the following taxable year;

(2) if the taxpayer becomes required to pay estimated tax after May 31, but before

September 1, the taxpayer must pay seventy-five percent of the required

In the Matter of the Protest of Elizabeth O. Brower, page 6 of 13
annual payment on or before September 15 and twenty-five percent on or

before January 15 of the following taxable year; and

(3) if the taxpayer becomes required to pay estimated tax after August 31, the

taxpayer must pay one hundred percent of the required annual payment on or

before January 15 of the following taxable year.

The Department asserts that each installment based on the prior year’s tax liability should be

equal to 25%, or more as required in some situations, of the required annual payment, so that

100% of the required annual payment has been paid by January 15th of the following year. See

NMSA 1978, § 7-2-12.2 (C).

Taxpayer contends that because the word “equal” is not used in the statute, NMSA 1978

Section 7-2-12.2, there is no statutory requirement of “equal” installments. Taxpayer contends

that her retirement income from investments has shown a tendency to go down. Taxpayer

contends that the uncertainty of her income, coupled with the unequal time periods, under the

Department’s interpretation of the statute, would require her to pay an unreasonable percentage

of her actual income. Taxpayer further contends that she used a formula for determining the

amounts of her estimated tax payments, provided by Federal Internal Revenue Service (IRS)

form 2210.

The primary goal in interpreting a statute is to give it the effect that the Legislature

intended. See State v. Davis, 2003-NMSC-022, 134 N.M. 172. Statutory construction begins by

looking at the plain meaning of the language. See id. See also Wood v. State Educ. Ret. Bd., 2011-

NMCA-020, ¶ 12, 149 N.M. 455. See also State v. Maestas, 2007-NMSC-001, 149 P.3d 933. See

also Johnson v. NM Oil Conservation Com’n, 1999-NMSC-021, 127 NM 120. “However, where

the language of an ordinance is ambiguous, courts must look beyond the plain language. In the

In the Matter of the Protest of Elizabeth O. Brower, page 7 of 13
face of ambiguity in a code, we ordinarily defer to how the city council, as its author, interprets

that code. When multiple sections of an ordinance come into play, we consider the relevant

sections together so that all parts are given effect. If the strict wording of the law suggests an

absurd result, we may interpret the statute to avoid such a result.” City of Rio Rancho vs. Logan,

2008-NMCA-011, ¶ 8 (internal citations and quotation marks omitted).

Under the Department’s interpretation of the statute, there is no flexibility. Each equal

estimated payment must be due at the prescribed time, to satisfy the aggregate amount of 25%,

50%, 75% and 100%. Under the Taxpayer’s interpretation of the statute, there must be some

flexibility in estimated taxes installments due, because the final amount of tax is unknown, based

on the actual income received in the taxable year, and based on the fact that the time periods

between due dates are not equal. The Taxpayer’s interpretation seems to be based on the statute

NMSA 1978 Section 7-2-12.2 (B) which defines the “required annual payment” as “the lesser

of: (a) ninety percent of the tax shown on the return of the taxable year or, if no return is filed,

ninety percent of the tax for the taxable year; or (b) one hundred percent of the tax shown on the

return for the preceding taxable year if the preceding taxable year was a taxable year of twelve

months and the taxpayer filed a New Mexico tax return for that preceding taxable year…” And

the further interpretation of flexibility seems to be based on the statute creating time periods of

differing length (two months, three months, four months) between due dates. See NMSA 1978

Section 7-2-12.2 (C).

The question of whether the statute is rigid or flexible is one of interpretation. Whether

the application could lead to absurd results is a necessary inquiry. Certainly, each person who is

required to pay estimated tax payments in equal installments suffers the same hardship in paying

a greater percentage of actual income in times when the equal installments are due only two

In the Matter of the Protest of Elizabeth O. Brower, page 8 of 13
months apart. Likewise, each person who is required to pay estimated tax payments in equal

installments benefits from the same reduced percentage of actual income in times when the equal

installments are due four months apart. The hearing officer believes the legislature intended the

statute to remain inflexible in so far as it intended the amounts to be paid in installments of 25%,

50%, 75% and 100% of the required annual payment based on the prior taxable year. This is

seen in the percentage described in Section 7-2-12.2 (C)(1-3). This section must be read in a

manner to give each provision affect. 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 also to be interpreted in a

manner to give the entire statute effect and not render portions of the statute superfluous).

The statute also allows a Taxpayer to base the estimated tax payments on the current tax

year. Because the required annual payment is “the lesser of” the full tax liability of the prior tax

year or 90% of the tax liability for the current tax year, the hearing officer believes that the

legislature could not have intended the statute to remain inflexible in so far as it requires that a

person pay installments solely based on the prior year. However, the statute and the

Department’s interpretations of the statutes still require installments should still amount to 25%

in April, 50% in June, 75% in September, and 90% of the required annual payment for that tax

year. There are exceptions built into the statute for farmers, but the Taxpayer is not a farmer. It

is also clear that Taxpayer, by January 15 of the following year, had paid more than 90% of the

2014 tax liability, satisfying the statutory requirement that the required annual payment is paid in

full by that time.

The Taxpayer should have followed form RPD-41272 to calculate the penalty associated

with the underpayments. Instead, the Taxpayer asks the Department to rely on her completion of

the IRS form 2210 to justify the underpayments. New Mexico has independent authority to

In the Matter of the Protest of Elizabeth O. Brower, page 9 of 13
impose an income tax. See Holt v. N.M. Dep't of Taxation & Revenue, 2002-NMSC-34, ¶6, 133

N.M. 11 (state has the authority to assess and collect tax independent of IRS). The IRS form is

not referenced by New Mexico statute and is not a substitute for the requirements of Section 7-2-

12.2. The Taxpayer has not overcome the presumption of correctness in the Department’s

application of the requirement of estimated payment percentages, and the Department has shown

that the Taxpayer submitted underpayment of estimated taxes, since the aggregate payments do

not amount to 25%, 50%, and 75% of the required annual payment as payments were made.

Penalty.

When a taxpayer underpays the required annual payment, in addition to amount of the

required annual payment underpaid the Department shall add to the underpaid tax a penalty,

following the formula specified in Section 7-1-67 (B) for the period of underpayment. See

NMSA 1978, § 7-2-12.2 (G). The Taxpayer did not challenge the methodology of assessment,

but the correctness in application of the assessment to her situation, addressed above. Taxpayer

argued that the penalty should be abated, because she applied a methodology approved by

federal authorities, and her underpayment was not due to an attempt to defraud, avoid a tax, or

other mischief.

In this case, Taxpayer and Department agreed that the total 2014 “required annual payment”

was paid by January 15, 2015. Because the estimated payment amounts were underestimated by the

Taxpayer, when the first three installments were paid, and the required annual payment was made

by January 15, 2015, the penalty provisions of NMSA (1978) Section 7-2-12.2 (G) take effect for

the period from April 15, 2014 when the first estimated tax installment became delinquent by

underpayment through January 15, 2015, when Taxpayer came into compliance.

In the Matter of the Protest of Elizabeth O. Brower, page 10 of 13
Taxpayer argues that the penalty of $22.35 should be abated because she paid the required

annual payment, and the underpayment was not due to fraud, negligence or disregard of rules and

regulations. The law as codified in NMSA 1978 Section 7-2-12.2 (H)(3) states: “No penalty shall

be imposed under Subsection G of this section for any taxable year if: … (3) “through either

withholding or estimated tax payments, the taxpayer paid the required annual payment as defined in

Subsection B of this section; or (4) the secretary determines that the underpayment was not due to

fraud, negligence or disregard of rules and regulations.”

The Department argued that the statute should be followed, insofar as it penalizes those

who pay less than the installment percentages due, when the installments are due.

The Taxpayer felt that her payments were made as required and that she was not

negligent or in disregard of the rules. Taxpayer stated that she determined the amounts of her

estimated payments by following the same percentages 25%, 50% and 75% of estimated 2014

income based on income received to date, annualized, as required under federal tax law, as

exemplified by her IRS form 2210.

No penalty will be imposed when a taxpayer pays the required annual payment in full by

January 15th of the following year. See NMSA 1978, § 7-2-12.2 (H). The Taxpayer failed to pay

the full amounts of estimated tax that were due when they were due, which triggered the penalty.

Taxpayer did pay the full amount of the required annual payment by January 15th of the

following tax year. Therefore, penalty assessment ends at the point the taxes were paid.

The Hearing Officer believes that the methodology employed by the Taxpayer was not

intended to avoid a tax, not due to fraud, or disregard of the rules and regulations. Nevertheless,

concerning negligence, the Taxpayer has not overcome the presumption of correctness. A

taxpayer’s lack of knowledge or erroneous belief is considered to be negligence for purposes of

In the Matter of the Protest of Elizabeth O. Brower, page 11 of 13
assessment of penalty. See Tiffany Const. Co., Inc. v. Bureau of Revenue, 1976-NMCA-127, 90

N.M. 16 (“Every person is charged with the reasonable duty to ascertain the possible tax

consequences of his action. This can be done by consultation with one's legal advisor.

Depending on the facts, failure to do so may constitute negligence.”). Taxpayer failed to

overcome the presumption of correctness, and the Department’s assessment was proper.

CONCLUSIONS OF LAW

A. The Taxpayer filed a timely written protest to the Assessment of penalty issued

under Letter ID number L1475153968 and jurisdiction lies over the parties and the subject matter of

this protest. The hearing was timely set and held within 90-days of protest under NMSA 1978,

Section 7-1B-8 (2015).

B. The Taxpayer paid estimated tax for 2014 in unequal installments beginning April

15, 2014 to trigger the penalty provisions of NMSA 1978, § 7-2-12.2 (G).

C. Taxpayer payed the required annual payment in full by estimated tax payments no

later than January 15, 2015. See NMSA 1978, § 7-2-12.2 (B).

D. Department properly assessed penalty against Taxpayer for the limited time frame of

April 15, 2014 through January 13, 2015, when the estimated payment delinquencies were fully

paid. See NMSA 1978, § 7-2-12.2 (H) (3).

For the foregoing reasons, the Taxpayer's protest is Denied.

DATED: March 18, 2016.

__ ___
Ignacio V. Gallegos
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

In the Matter of the Protest of Elizabeth O. Brower, page 12 of 13
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, § 7-1-25, 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. A copy of the Notice of Appeal should be mailed to John Griego,

P. O. Box 6400, Santa Fe, New Mexico 87502. Mr. Griego may be contacted at 505-827-0466.

In the Matter of the Protest of Elizabeth O. Brower, page 13 of 13