Can a New Mexico worker leave their wages off their state income tax return and claim a refund on the theory that wages are not taxable income?

Plain-English summary

Anthony Cordova worked for Intel Corporation in Albuquerque, maintaining the software, hardware, and network systems that run Intel's silicon-wafer manufacturing robots. Intel paid him $42,144.24 in wages in 1995 and withheld $1,944.64 in New Mexico income tax. But Cordova belonged to a "law study group" — meeting Thursday nights at the UNM law library — whose members believed they aren't subject to income tax. A fellow group member prepared his returns, leaving the Intel wages off the New Mexico return (which reported only $3,503 of other income, mostly proceeds from selling Intel stock) and claiming a refund of the entire $1,945 withheld. The Department denied the refund, and Cordova protested.

The Hearing Officer denied the protest:

• Wages are income. The Internal Revenue Code defines gross income as "all income from whatever source derived," expressly including "compensation for services" (26 U.S.C. § 61). Cordova's Intel wages fall squarely within that definition.
• New Mexico's income tax is built on the federal numbers. New Mexico "piggy-backs" the federal system: state "base income" starts from federal adjusted gross income (§ 7-2-2(B)), then deductions produce "net income" that is taxed (§§ 7-2-2(N), 7-2-3). Because the wages are federal income, they are New Mexico income too.
• The tax-protester arguments have been rejected everywhere. Cordova's group relied on theories that wages aren't taxable, that only "privileges" can be taxed, and that "freeborn natural individuals" are exempt. The Hearing Officer cited the federal courts' uniform rejection of these (Coleman v. Commissioner, Lovell v. United States, Brushaber, Flint v. Stone Tracy), and explained that the older cases the group quoted (Jack Cole Co. v. MacFarland, Redfield v. Fisher) turned on unique state-constitution language that has no counterpart in the U.S. or New Mexico constitutions.
• A pointed warning. The Hearing Officer called Cordova intelligent and sincere but urged him to read the current law, and noted that filing this way can bring felony charges (§§ 7-1-72, 7-1-73) and a 50% fraud penalty (§ 7-1-69(B)) — and encouraged him to file amended, correct returns.

What this means for you

Wages are taxable — no study-group theory changes that

If you earn wages in New Mexico, they are income for both federal and state tax purposes, full stop. The arguments that circulate in "tax honesty" or "sovereign citizen" circles — that wages aren't income, that only government-granted privileges can be taxed, or that you can opt out as a "natural individual" — have been rejected by the courts hundreds of times. Acting on them doesn't reduce your tax; it exposes you to penalties.

You can't get a refund of tax on income you actually earned

Cordova had real wages and real withholding. Leaving the wages off the return didn't make the tax disappear — it just produced a refund claim the Department correctly denied. Withholding is a prepayment of tax you owe; you only get it back if your actual tax is lower than what was withheld, not by mischaracterizing what you earned.

Who prepares your return doesn't shift the legal reality

Cordova said he didn't understand his own returns because another group member prepared them. That didn't help. You are responsible for what's on your return, and a preparer who shares a mistaken legal theory doesn't make the theory correct. If a preparer tells you your wages aren't taxable, that is a red flag, not a strategy.

The stakes escalate once you've been told the law

The decision stresses that Cordova had now "been informed of the law." Continuing to file frivolous returns after that point is what turns a denied refund into exposure for civil fraud penalties and even criminal charges. If you've relied on these theories, the safer path is to file amended, accurate returns promptly.

Common questions

Q: I had New Mexico tax withheld from my paycheck. Can I just claim it all back?
A: Only if your actual tax liability is less than what was withheld. Your wages are taxable income, so withholding on them generally reflects tax you owe — you can't recover it by leaving the wages off your return.

Q: My return preparer says wages aren't really income. Is that true?
A: No. Wages are compensation for services and are income under Internal Revenue Code § 61, which flows into New Mexico's income tax. Courts have uniformly rejected the contrary theories. A preparer promoting them is a warning sign.

Q: These arguments cite real court cases — why don't they work?
A: The cases the movement quotes are typically old, out of context, or based on state-constitution language with no equivalent in the U.S. or New Mexico constitutions. Current, directly applicable federal decisions hold that wages are taxable, and those control.

Q: What are the risks of filing this kind of return?
A: Beyond having the refund denied, New Mexico can impose a 50% civil penalty for fraudulent failure to pay (§ 7-1-69(B)) and treats filing false returns or evading tax as felonies (§§ 7-1-72, 7-1-73). The Hearing Officer urged filing corrected, amended returns instead.

Citations and references

Statutes:

• 26 U.S.C. § 61 — federal gross income means all income from whatever source derived, including compensation for services; 26 U.S.C. § 62 — adjusted gross income
• § 7-2-2(B) NMSA 1978 — New Mexico "base income" equals federal adjusted gross income, with certain net-operating-loss adjustments; §§ 7-2-2(N) and 7-2-3 NMSA 1978 — "net income" after allowed deductions
• § 7-1-24 NMSA 1978 — written protest to a denied refund claim
• §§ 7-1-72 and 7-1-73 NMSA 1978 — felony offenses for filing false returns or evading tax; § 7-1-69(B) NMSA 1978 — 50% civil penalty for fraudulent failure to pay tax

Cases cited:

• Coleman v. Commissioner of Internal Revenue, 791 F.2d 68 (7th Cir. 1986) — wages are income and the tax on wages is constitutional; tax-protester arguments are "tired arguments"
• Lovell v. United States, 755 F.2d 517 (7th Cir. 1984) — all individuals must pay federal income tax on wages, regardless of whether they received any "privileges" from the government
• United States v. Sloan, 939 F.2d 499 (7th Cir. 1991) — rejecting the "sovereign/non-citizen" theory
• Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916) — upholding the constitutionality of the federal income tax
• Flint v. Stone Tracy Co., 220 U.S. 107 (1911) — an income tax may be imposed on privileges such as conducting business
• Jack Cole Co. v. MacFarland, 337 S.W.2d 453 (Tenn. 1960) — distinguished; rested on unique Tennessee-constitution language absent from the U.S. and New Mexico constitutions
• Redfield v. Fisher, 292 P. 813 (Or. 1930) — distinguished; struck an Oregon tax under an Oregon uniformity clause, and its "natural rights" dicta has been rejected by the federal courts

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Anthony Cordova
• Decision PDF: D&O 97-27

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
ANTHONY CORDOVA NO. 97-27
PROTEST TO DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

June 6, 1997. Anthony Cordova, hereinafter, Mr. Cordova or "Taxpayer", represented himself at

the hearing. The Taxation and Revenue Department, hereinafter, "Department", was represented

by Frank D. Katz, Chief Counsel. Based upon the evidence and the arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer was born in Albuquerque, New Mexico on January 6, 1967 and

continues to reside there.

2. The Taxpayer was employed by Intel Corporation during calendar year 1995 and

continues to be employed by Intel Corporation at the present time. The Taxpayer's job duties
involve maintaining the software, hardware and network drives that run the robotics which perform

the silicon wafer manufacturing operations at Intel Corporation.

3. In 1995, the Taxpayer was paid $42,144.24 in wages by Intel Corporation.

4. In 1995, Intel Corporation withheld $1,944.64 in New Mexico income tax
   withholding taxes from the wages paid the Taxpayer.

5. For tax year 1995, the Taxpayer filed a personal income tax return with the Internal
   Revenue Service which reported $3,477 on line 1, which calls for the total wages, salaries and tips

to be reported by taxpayers. This amount was income the Taxpayer received from the sale of some

Intel Corporation stock. The Taxpayer also reported $26 in interest income, for a total of $3,503 in
"adjusted gross income" as shown on the Taxpayer's 1995 Federal income tax return.

6. For tax year 1995, the Taxpayer filed a New Mexico personal income tax return

showing $3,503 of Federal adjusted gross income. The Taxpayer's return requested a refund in the

amount of $1,945.

7. The Taxpayer's 1995 state and federal tax returns were prepared by Steven C.

Massoth, who is a member of the law study group of which the Taxpayer is a member.

8. On June 13, 1996, the Department denied the Taxpayer's claim for refund of $1,945.

9. On July 10, 1996, the Taxpayer filed a written protest to the Department's denial of

his claim for refund.

10. The Taxpayer is part of a law study group which meets every Thursday night at the

Law Library of the University of New Mexico Law School to study tax law.

DISCUSSION
The sole issue to be determined herein is whether the Department erroneously denied the

Taxpayer a refund of the income taxes withheld from his wages from employment in New Mexico.

The Taxpayer is part of a "law study group" which, apparently, does not believe that its

members are subject to income taxation by state or federal governments. The Taxpayer claimed

not to understand how the figures reported on his New Mexico and federal income tax return were
arrived at because the returns were prepared by another member of his law study group. The

Taxpayer did admit, however, that Intel Corporation, his employer, paid him $42,144.24 in 1995, as
reflected on his W-2 wage and tax statement. The Taxpayer also acknowledged that this amount

was not what was reported on his 1995 New Mexico personal income tax return. New Mexico
imposes its income tax upon the net income of "every resident individual". New Mexico is among

the majority of states which "piggy-back" or use the federal income tax system as the basis for

calculating state income taxes. The calculation of personal income taxes in New Mexico begins

with a determination of "base income" which is defined to be the taxpayer's "adjusted gross

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income" as defined in Section 62 of the Internal Revenue Code, plus certain net operating loss

deductions which can be deducted for federal purposes in arriving at federal adjusted gross income

but which New Mexico does not allow to be deducted in the same manner. See, NMSA 1978, §

7-2-2(B). New Mexico then allows certain deductions, such as the federal standard or itemized

deductions and deductions for income from federal obligations, to arrive at "net income" upon

which income tax is imposed. See, NMSA 1978, §§ 7-2-2(N) and 7-2-3. Because Mr. Cordova's

arguments are, in essence, directed at the legality of the federal income tax, and provisions of the

Internal Revenue Code, which provide the basis for calculating New Mexico's income tax, the

Internal Revenue Code, and the federal authority interpreting it and the United States Constitution

will be consulted to determine Mr. Cordova's protest.

The Internal Revenue Code, hereinafter, "Code", defines adjusted gross income to be gross

income, less certain deductions which are listed in Section 62 of the Code. Gross income is

defined in Section 61 of the Code as follows:
Except as otherwise provided in this subtitle, gross income means

all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, fringe benefits and similar
items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowments contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.

26 U.S.C. § 61 (1997). This definition is quite broad and inclusive, and is certainly broad enough

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to include under the first listed category of compensation for services the wages or salary paid by

Intel Corporation to Mr. Cordova.

Mr. Cordova and the other members of the "law study group" in which he participates are

part of a growing group of people who may be classified as tax resisters or tax protestors. Mr.

Cordova did not really articulate the basis for why he believes that his income from wages paid to

him by Intel Corporation is not subject to income tax, but he provided some citations to authority in

support of his position. These will be addressed later in this decision.

From the outset, I would note that there is ample federal authority upholding the

constitutionality of the federal income tax, and upholding the imposition of federal income tax on

wages, specifically. I am thus led to the conclusion that Mr. Cordova's law study group was either

extremely selective in its reading of the law on point, or it was extremely sloppy in conducting its

research. I would refer Mr. Cordova to one case in particular, which addresses the standard tax

resister arguments and cites to numerous federal cases upholding federal income taxes in the face of

these arguments. In Coleman v. Commissioner of Internal Revenue, 791 F.2d 68, the Seventh

Circuit Court of Appeals addressed the consolidated cases of Mr. Norman Coleman and Mr. Gary

Holder. Both of these individuals had argued that their wages were not subject to federal income

taxation. The court had this to say about those arguments:
Coleman says that wages may not be taxed because they come from his person, a
depreciating asset. The personal depreciation offsets the wage, leaving no net
income. Coleman thinks that only net income may be taxed under the Sixteenth
Amendment--net income as Coleman defines it, not as Congress does. Holder,
who styles himself a "private citizen," insists that wages may not be taxed because
the Sixteenth Amendment authorizes only excise taxes, and in Holder's world
excises may be imposed only on "government granted privileges." Because Holder
believes that he is exercising no special privileges, he thinks he may not be taxed.
These are tired arguments. The code imposes a tax on all income. See, 26
U.S.C. § 61. Wages are income, and the tax on wages is constitutional. See,
among hundreds of other cases, United States v. Thomas, 788 F.2d 1250, 1253
(7th Cir. 1986); Lovell v. United States, 755 F.2d 517 (7th Cir. 1984); Granzow v.
CIR, 739 F.2d 265, 267 (7th Cir. 1984); United States v. Koliboski, 732 F.2d 1328,
1329 & n. 1 (7th Cir. 1984). See also Brushaber v. Union Pacific R.R., 240 U.S.
1, 12, 24-15, 36 S.Ct. 236, 239, 244-45, 60 L.Ed. 2d 493 (1916).

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Id. at 70. As this case and the cases cited therein indicate, there is really no question that Mr.

Cordova's income from wages paid by Intel Corporation are income for federal tax purposes, and as

such, would be included in federal adjusted gross income for federal purposes, and by inference, for

purposes of calculating New Mexico personal income taxes.

Because Mr. Cordova provided citations and quotations from various federal and state

cases, those authorities will now be addressed.

First, the case of Jack Cole Company v. MacFarland, 337 S.W.2d 453 (Tenn. 1960) was

cited for the proposition that the right to receive income or earnings is a right belonging to every

person, and the realization and receipt of income is therefore not a "privilege" which may be taxed.

A review of this case reveals that the Tennessee Supreme Court based this conclusion on some

rather unique language found in the Tennessee Constitution which had granted the legislature the

power to tax the income from stocks and bonds. The Tennessee Supreme Court in Evans v.

McCabe, 52 S.W.2d 159 (1932) had construed this language narrowly as only granting the

legislature the right to tax income from stocks and bonds, thus implicitly restricting the legislature's

right to tax income from any other source other than stocks and bonds. The language relied upon

is not found in either the United States Constitution or the Constitution of the state of New Mexico.

Thus, while it may be the law of Tennessee that the right to receive income is a privilege which

cannot be taxed, that is not the law of either the United States or New Mexico. In fact, it has long

been established in federal law that an income tax may be imposed upon privileges, such as the

privilege of conducting business. See, Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55

L.Ed. 389 (1911).

The Taxpayer also cited to Redfield v. Fisher, 292 P. 813 (Or. 1930), a 1930 Oregon

Supreme Court decision which had struck down an Oregon tax on intangible property owned by

individuals. The court struck down the tax as violative of the provision of the Oregon Constitution

which requires taxation to be uniform on the same class of subjects. Because the same intangible

property would not have been taxed when owned by corporations, the court ruled the tax

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unconstitutional. The Taxpayer cited to dicta in the court's opinion which stated that an individual,

unlike a corporation, cannot be taxed for the mere privileges of existing and owning property,

which are natural rights. This "natural rights" theory apparently derives from a line of thought

embraced by the tax protester movement by which they claim that they are not citizens of the

United States, but are "freeborn, natural individuals", and as such are the master or sovereign, and

are not a servant to the government. This theory has been soundly rejected by the federal courts

which have upheld the imposition of the federal income tax. As stated in Lovell, v. U.S., 755 F.2d

517 (7th Cir., 1984):
All individuals, natural or unnatural, must pay federal income tax on their wages, regardless
of whether they received any "privileges" from the government.

Id. at 519. See, also, U.S. v. Sloan, 939 F. 2d 499, 500-501 (7th Cir. 1991).

The Taxpayer also provided quotations from several old state and federal cases which

distinguished between profit and wages or wages and income. None of these cases involved the

interpretation or constitutionality of the Internal Revenue Code as it exists today. Given the clear

holdings of more recent federal cases, such as the Coleman case, quoted above, these authorities

are simply not persuasive.

Mr. Cordova impressed me as being both intelligent and sincere in pursuing his protest. I

urge him to pursue his study of the law of taxation and to read, not just the cases which espouse

outdated or superseded views of the law of taxation, but the more recent cases which are directly

applicable to the arguments being propounded by the tax protester movement. Can Mr. Cordova

really believe that his wages are not subject to income taxation when the law is to the contrary and

literally millions of other United States citizens report and pay such income taxes on their earnings

and wages every year?

I would leave Mr. Cordova with the following admonition:
Some people believe with great fervor preposterous things that just happen to coincide with
their self-interest. "Tax protesters" have convinced themselves that wages are not
income, that only gold is money, that the Sixteenth Amendment is unconstitutional,
and so on. These beliefs all lead--so tax protesters think--to the elimination of their

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obligation to pay taxes. The government may not prohibit the holding of these
beliefs, but it may penalize people who act on them. (emphasis added).

The federal caselaw contains hundreds of cases where tax protesters have been sent to prison for tax

evasion or fined substantially for filing frivolous returns based upon the theories espoused by the

tax protestor movement. New Mexico also makes it a felony to file false returns or to evade taxes,

see, NMSA 1978, §§ 7-1-72 and 7-1-73, and it imposes a 50% of tax civil penalty for the fraudulent

failure to pay any tax required to be paid. NMSA 1978 § 7-1-69(B). Mr. Cordova may be faced

with such consequences if he should continue to file returns in the same manner as he filed his 1995

state and federal returns. This is especially so now that he has been informed of the law. He has
the opportunity to rectify his error by filing amended returns with both New Mexico and the

Internal Revenue Service. I would urge him to act on this opportunity.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest, pursuant to NMSA 1978 § 7-1-24 to

the Department's denial of his claim for refund and jurisdiction lies over both the parties and the

subject matter of this protest.

2. The Taxpayer's wages from Intel Corporation are included in both "gross income"

and "adjusted gross income" as those terms are defined in the Internal Revenue Code.

3. The Taxpayer's wages from Intel Corporation are included in both "base income"

and "net income" as those terms are defined in the Income Tax Act, Chapter 7, Article 2, NMSA

1978.

4. The Taxpayer is not entitled to a refund of the taxes withheld from his wages earned

from Intel Corporation in 1995 because those wages were properly subject to the imposition of New

Mexico's income tax.

For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 16th day of July, 1997.

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