Can a chiropractor avoid New Mexico gross receipts and income tax with tax-protester arguments, and does the 50% fraud penalty apply if he sincerely believed them?

Plain-English summary

Dr. Christopher Nelson, an Albuquerque chiropractor, retired his gross receipts tax (CRS) registration in February 1992 after coming to believe he wasn't legally required to register, report, or pay tax on his chiropractic income — a set of tax-protester theories he also applied to stop filing income tax returns (he even recorded an "Affidavit of Revocation and Rescission" of his Social Security number). Because he filed nothing, the Department issued provisional (estimated) assessments: gross receipts tax of about $36,700 (plus a 50% fraud penalty and interest) for March 1992 through December 1996, and personal income tax for 1989–1995 — estimating his monthly receipts at $10,900 (double his 1991 average). He refused to produce his books even after being ordered to, and chose to fight only on legal theories challenging the state's jurisdiction to tax him.

The Hearing Officer granted the protest in part and denied it in part. Every jurisdictional theory failed, so the tax and interest stood — but the fraud penalties were abated, and two years of income tax were removed because he had actually filed those returns:

• He bears the burden — even on jurisdiction. The § 7-1-17(C) presumption that an assessment is correct is worded broadly and isn't limited to the amount of tax; it covers the basis for the tax too. So Dr. Nelson had to prove the state lacked power to tax him.
• He had to be registered, and he owed gross receipts tax. His argument that only those "doing business with the state" must register (§ 7-10-4) was true but beside the point — a separate provision, § 7-1-12 and Regulation 3 NMAC 1.1.15.1, requires all taxpayers to register. And § 7-9-4 taxes anyone "engaging in business" in New Mexico; performing chiropractic services for money is exactly that. His "a citizen exercises no government privilege" and "the state can't tax my right to pursue my calling" arguments (citing Butcher's Union and Murdock) were rejected as meritless — governments may tax income from engaging in business (Flint; Brushaber; Lovell). Retiring his tax number didn't help either: as a sole proprietor he's personally liable regardless of the number on the assessment.
• He was a New Mexico resident, so the income tax applied. His "I'm a citizen, not a resident" theory failed — the two aren't mutually exclusive, and he plainly was a resident (living in New Mexico since 1988, voting, a driver's license, a business here). His "no taxable source under § 861 / 26 CFR 1.861-8" argument — a classic protester claim — was wrong; his chiropractic income is gross income under IRC §§ 61 and 861. Sending the IRS an affidavit it never rebutted proved nothing and doesn't estop the government (Muckey).
• But two years of income tax were abated. After the hearing it turned out Dr. Nelson had filed New Mexico returns for 1989 and 1990 (showing a loss and a $22 liability). Those actual returns overcame the estimated assessments, so the Department was ordered to abate Assessment Nos. 691910 and 691911 entirely.
• And the 50% fraud penalties were abated. The § 7-1-69(C) fraud penalty requires the Department to prove intent to defraud. The Hearing Officer wasn't convinced Dr. Nelson lacked a genuine belief in his (wrong) arguments — he had staked his whole case on them and accepted a higher tax bill rather than produce records — so intent to defraud wasn't proven, and all the penalties were abated. The Hearing Officer urged Dr. Nelson to abandon the tax-protester movement, warning that continuing now that he knows the arguments are meritless could expose him to the fraud penalty in the future.

What this means for you

Business owners and professionals tempted by "you don't have to pay" theories

The arguments Dr. Nelson raised — that individuals exercise no taxable "privilege," that only businesses dealing with the state must register, that income isn't from a taxable "source" under § 861 — are recognized tax-protester theories, and they lose. Performing services for money in New Mexico makes you subject to gross receipts tax, and New Mexico residents owe income tax on that income. Retiring your registration number or filing an affidavit doesn't change your liability; it just stops the reporting the law still requires.

Anyone who stops filing based on a belief the tax doesn't apply

If you don't file and don't produce records, the state will estimate your tax — here, at double the last reported year — and you lose the chance to show your real (often lower) numbers. Dr. Nelson "paid a price" in a higher assessment precisely because he refused discovery. Even a sincere belief won't erase the tax; at best it may spare you the fraud penalty, and only if the state can't prove intent to defraud.

Understanding the fraud penalty

The 50% penalty under § 7-1-69(C) is different from the ordinary negligence penalty: the Department must prove you acted with intent to defraud. A genuinely held (even if wrong) belief can defeat that penalty — but note the Hearing Officer's warning: once you've been told the arguments are meritless, continuing to act on them can itself become evidence of fraudulent intent.

Accountants and tax professionals

This decision is a thorough rebuttal of the standard protester playbook under New Mexico law, and it makes three points worth citing: the § 7-1-17(C) presumption of correctness reaches jurisdictional challenges, not just the amount; § 7-1-12 (not the narrower § 7-10-4 registration act) is the registration hook for ordinary taxpayers; and the § 7-1-69(C) fraud penalty is the Department's burden, defeated here by the taxpayer's apparent sincerity. Note too that actually-filed returns overcame the estimated assessments for two years — documentation still matters even in a protester case.

Common questions

Q: He said he was a "citizen," not a "resident" — why did the income tax still apply?
A: Citizenship and residency aren't mutually exclusive. New Mexico taxes residents — people domiciled here — and Dr. Nelson was clearly a resident: he lived in New Mexico since 1988, voted, held a driver's license, and ran his business here. So the personal income tax applied.

Q: Doesn't only a business "doing business with the state" have to register?
A: That's the narrow Gross Receipts Tax Registration Act (§ 7-10-4), which didn't apply to him. But a separate law, § 7-1-12 and its regulation, requires all taxpayers to register, and § 7-9-4 taxes anyone engaging in business in New Mexico. He owed the tax and had to be registered.

Q: If his arguments were wrong, why was the 50% penalty removed?
A: Because that penalty requires the Department to prove intent to defraud, and the Hearing Officer was convinced Dr. Nelson genuinely believed his arguments — he bet his whole case on them and took a higher tax bill rather than produce records. Without proof of fraudulent intent, the penalty couldn't stand. The decision warned, though, that continuing to press the theories now could support a fraud penalty later.

Q: Why were 1989 and 1990 income taxes abated when the rest weren't?
A: Those assessments were estimates, and it later turned out Dr. Nelson had actually filed New Mexico returns for 1989 and 1990 (showing a loss and a $22 liability). The real returns overcame the estimates, so those two assessments were abated in full; the estimated 1991–1995 assessments stood.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico handles tax-protester arguments and the fraud penalty, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-1-17(C) NMSA 1978 — any assessment is presumed correct (broadly worded; reaches jurisdiction, not just amount)
• § 7-1-12 NMSA 1978 — the Department's taxpayer registration and identification system; Regulation 3 NMAC 1.1.15.1 — implements it and requires taxpayer compliance
• § 7-9-4 NMSA 1978 — imposes gross receipts tax on the privilege of engaging in business; § 7-9-3(E) — "engaging in business"; § 7-9-3(F) — "gross receipts" includes money from performing services in New Mexico
• § 7-2-3 NMSA 1978 — income tax on resident individuals; § 7-1-2(S) NMSA 1978 and Regulation 3 NMAC 3.1.9.2 — "resident"/domicile; § 7-2-12 NMSA 1978 — a New Mexico return is required of those with a federal filing requirement; 26 U.S.C. §§ 61, 62, 861 — federal gross income and U.S.-source income
• § 7-1-69(C) NMSA 1978 — 50% penalty for failure to pay tax with intent to defraud; the Department bears the burden of proving fraudulent intent
• § 7-10-4 NMSA 1978 — Gross Receipts Tax Registration Act (applies to those doing business with the state; did not apply here); § 7-1-24 NMSA 1978 — protest procedure

Case law cited:

• Brushaber v. Union Pacific Railroad, 240 U.S. 1 (1916); Flint v. Stone Tracy Co., 220 U.S. 107 (1911) — governments may tax income from engaging in business
• Lovell v. United States, 755 F.2d 517 (7th Cir. 1984) — all individuals must pay income tax on their earnings regardless of any government "privilege"
• Coleman v. Commissioner, 791 F.2d 68 (7th Cir. 1986) — rejecting tax-protester arguments (cited by the Hearing Officer as recommended reading)
• Butcher's Union Co. v. Crescent City Co., 111 U.S. 746 (1884); Murdock v. Pennsylvania, 319 U.S. 105 (1943) — cited by the taxpayer; held not to bar a tax on the privilege of engaging in business
• Muckey v. N.M. Department of Human Services, 102 N.M. 265, 694 P.2d 521 (Ct. App. 1985) — estoppel against the government is highly disfavored
• Burroughs v. Board of County Commissioners of Bernalillo County, 88 N.M. 303, 540 P.2d 233 (1975) — courts do not read limiting language into a statute that makes sense as written

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Dr. Christopher Nelson
• Decision PDF: D&O 98-18

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
DR. CHRISTOPHER NELSON,
ID. NO. 02-116356-00 1, NO. 98-18
PROTEST TO ASSESSMENT NOS. 2115295,
AND 691910 THROUGH 691916

DECISION AND ORDER

This matter came on for formal hearing on February 19, 1998 before Gerald B.

Richardson, Hearing Officer. Dr. Christopher Nelson, hereinafter, “Dr. Nelson”,

represented himself at the hearing. The Taxation and Revenue Department, hereinafter,

“Department”, was represented by Bruce J. Fort, Esq. At the close of the hearing, the

record was held open for Dr. Nelson to submit additional information concerning income

tax filings in prior years. The record was supplemented with that information on March

11, 1998, and the matter was considered submitted for decision at that time. Based upon

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

FOLLOWS:

FINDINGS OF FACT

1. On February 27, 1997, the Department issued Assessment No. 2115295 to

Nelson Chiropractic Evaluation & Treatment Center, New Mexico tax identification no.

02-116356-00 1 in the total amount of $68,655.29; consisting of $36,692.74 in gross
receipts tax, $18,346.60 in penalty and $13,615.95 in interest for the reporting periods of

March, 1992 through December, 1996.

2. Although Dr. Nelson had retired the tax identification number for Nelson

Chiropractic Evaluation and Treatment Center in February of 1992, the Department

issued Assessment No. 2115295 under the tax identification number for Nelson

Chiropractic Evaluation and Treatment Center based upon the evidence it had in the form

of yellow pages advertisements from the U.S. West directory for Albuquerque, New

Mexico for the years 1994, 1995 and 1996 which indicated that Dr. Nelson was

advertising himself as a chiropractic physician. Rather than create a new tax

identification for Dr. Nelson for reporting gross receipts from performing chiropractic

services, the Department used Dr. Nelson’s former tax identification number.

3. Dr. Nelson, through Nelson Chiropractic Evaluation and Treatment Center,

had reported gross receipts taxes to the Department through February of 1992, until he

retired that tax identification number with the Department. Subsequent to that time, Dr.

Nelson filed no returns or reports with the Department reporting receipts from performing

chiropractic services and paid in gross receipts tax.

4. During calendar year 1991, Nelson Chiropractic Evaluation and Treatment

Center reported gross receipts to the Department in amounts ranging from $3,000 to

$9,000 per month.

5. Assessment No. 2115295 is a provisional assessment, which estimated Dr.

Nelson’s gross receipts from engaging in the business of rendering chiropractic services,

because no returns reporting actual receipts were filed by Dr. Nelson. In order to protect

the interests of the state in collecting all taxes owing, the Department estimated Dr.

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Nelson’s gross receipts to be $10,900 per month for the reporting periods of March, 1992

through December, 1996. This figure was calculated by doubling the amount of gross

receipts reported on average during the calendar year 1991. It also assessed a 50% of tax

fraud penalty, plus interest on the amount of estimated unpaid taxes.

6. The initial check of the Department’s records for income tax filing and

reporting indicated that the Department had no record that Dr. Nelson had filed and

reported personal income taxes for tax years 1989 through 1995. For tax years 1989

through 1991, the Department used the actual gross receipts Dr. Nelson reported to the

Department for those years to estimate his taxable income for those tax years. For tax

years 1992-1995, the Department used the $10,900 figure it had used as Dr. Nelson’s

estimated monthly gross receipts to estimate the amount of Dr. Nelson’s taxable income

for those tax years. It then calculated the personal income tax it estimated Dr. Nelson to

owe by applying an 8% tax rate to Dr. Nelson’s estimated taxable income to arrive at

income tax owing. The Department also assessed a 50% fraud penalty and interest on the

amount of its estimated unpaid taxes.

7. On March 28, 1997, the Department mailed Assessment Nos. 691910 through

691916 for tax years 1989 through 1995 to Dr. Nelson, assessing personal income tax,

penalty and interest as follows:

Year Income Tax Penalty Interest Total
1989 16,956 1,356.48 678.24 1,390.39 3,425.11
1990 84,392 6,751.36 3,375.68 5,907.44 16,034.48
1991 65,936 5,274.88 2,637.44 3,824.29 11,736.61
1992 131,880 10,550.40 5,275.20 6,066.48 21,892.08
1993 131,880 10,550.40 5,275.20 4,483.92 20,309.52
1994 131,880 10,550.40 5,275.20 2,901.36 18,726.96
1995 131,880 10,550.40 5,275.20 1,318.80 17,144.40

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8. On March 18, 1997, Dr. Nelson filed a timely, written protest to Assessment

No. 2115295 with the Department.

9. On April 30, 1997, Dr. Nelson filed a written protest to Assessment Nos.

691910 through 691916 with the Department. That protest became timely when, on June

27, 1997, the Department granted a retroactive extension of time to file a protest to those

assessments.

10. In order to more accurately determine the amount of gross receipts and

personal income tax for which Dr. Nelson may be liable, the Department served

interrogatories and requests for production upon Dr. Nelson requesting that he identify

all income received during tax years 1993-1996 and requesting that Dr. Nelson provide

books of account, financial statements, general ledgers, bank statements, check registers

and other financial documents which would be relevant to determining Dr. Nelson’s

income and gross receipts.

11. Dr. Nelson’s answers to the interrogatories and requests for production were

not responsive. As a result of a Motion to Compel full and complete responses to the

Department’s interrogatories and request for production, Dr. Nelson was ordered to

respond in a full, responsive and complete manner.

12. Dr. Nelson declined to respond as ordered. Instead, Dr. Nelson elected to

waive any arguments he might make about the amount of the Department’s assessments

and to present his case on legal theories challenging the Department’s jurisdiction to

impose tax, and the hearing was allowed to proceed accordingly.

13. As a result of Dr. Nelson’s testimony at the formal hearing, a more thorough

search of the Department’s income tax records was made and it was discovered that Dr.

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Nelson did file New Mexico personal income tax returns for tax years 1989 and 1990 and

the parties agreed that the record could be supplemented with copies of those returns.

14. Dr. Nelson’s 1989 New Mexico personal income tax return revealed that in

1989, Dr. Nelson had a loss in the amount of $9,359 of federal adjusted gross income,

and that no taxes were owing for that year. The federal Schedule C form included with

Dr. Nelson’s 1989 return indicated that he had $54,015 in gross receipts from his

business, called Nelson Chiropractic Center, but that his business expenses exceeded his

business income, resulting in a loss of $9,610.

15. Dr. Nelson’s 1990 New Mexico personal income tax return revealed that in

1990, Dr. Nelson had $12,440 in federal adjusted gross income, and that his 1990

personal income tax liability was $22, which was paid with the filing of the return.

16. The Department obtained Dr. Nelson’s social security number, 410-90-0778,

under which the personal income tax assessments were issued, from the Department’s

New Mexico driver’s license records.

17. On July 16, 1992, Dr. Nelson recorded in the Bernalillo County, New Mexico

records an “Affidavit of Revocation and Rescission” purporting to revoke, rescind, cancel

and render null and void ab initio Dr. Nelson’s social security application which caused

social security number 410-90-0778 to be established for him. The affidavit also declared

Dr. Nelson’s position that he was not subject to or liable for federal income tax. Dr.

Nelson mailed a copy of his affidavit to the United States Department of Treasury and

provided a set amount of time for them to respond to or rebut the statements in his

affidavit.

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18. Dr. Nelson has lived primarily in New Mexico since 1988, having no

residence outside of New Mexico since moving here in 1988.

19. Dr. Nelson has had a New Mexico driver’s license since 1989.

20. Dr. Nelson has been registered to vote in New Mexico at various times since

moving to New Mexico. From 1989-1996, Dr. Nelson was not registered to vote in any

other states other than New Mexico.

21. Dr. Nelson has been licensed as a chiropractic physician in New Mexico since

1988.

22. Sometime in 1992 Dr. Nelson came to hold the belief that he was not required

by law to register with the Department and to file and pay gross receipts taxes on the

moneys he received from performing chiropractic services in New Mexico. This was the

reason he retired the tax identification number he had previously had with the Department

under Nelson Chiropractic and Evaluation Center and ceased to report gross receipts or

pay gross receipts taxes to the Department.

23. At approximately the same time, Dr. Nelson came to believe that he is not

required to file a federal income tax return declaring as income the money he received

from performing chiropractic services. As a result of this belief, Dr. Nelson also believed

that he was not required to file New Mexico personal income tax returns. He filed no

income tax returns with the Department for tax years 1991 through 1996.

24. During the period from February, 1992 through 1993, Dr. Nelson performed

chiropractic services in New Mexico while acting as a minister of a Universal Life

Church congregation. All money paid him for performing chiropractic services was

donated to the Universal Life Church.

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25. During calendar years 1994, 1995 and 1996, Dr. Nelson performed

chiropractic services in New Mexico and had gross receipts from performing chiropractic

services in New Mexico.

DISCUSSION

Dr. Nelson has raised numerous arguments protesting the Department’s

assessments of both personal income tax and gross receipts tax. Those two tax programs

and the assessments under them will be discussed separately in the context of this

decision. Dr. Nelson raised an issue concerning the burden of proof with respect to both

tax programs, however, so it will be discussed first.

Dr. Nelson argues that the presumption of correctness of assessments of tax

applies only to the amount of tax assessed and would not apply to the issue of whether

jurisdiction to impose tax exists. As authority for this argument, Dr. Nelson cited 5

U.S.C. § 556(d), a provision of the federal administrative procedure act, which provides

in pertinent part that, “[E]xcept as otherwise provided by statute, the proponent of a rule

or order has the burden of proof.” This provision, however, has no applicability to the

proceedings herein. In the first place, the federal administrative procedures statutes have

no applicability to administrative proceedings being conducted pursuant to state law.

This is made clear by the definition of “agency” in 5 U.S.C. § 551(1), which provides in

pertinent part that, “‘agency’ means each authority of the government of the United

States,...” (emphasis added). The New Mexico Taxation and Revenue Department is an

agency of the government of the state of New Mexico, not the federal government.

Hearings of protests to assessments of tax by the Department are governed by § 7-1-24

NMSA 1978, which is a provision of the Tax Administration Act, §§ 7-1-1 et seq. NMSA

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1978. The Tax Administration Act applies to and governs the administration and

enforcement of taxes under many of the statutes the Department is charged with

administering, including the Income Tax Act and the Gross Receipts and Compensating

Tax Act. See, § 7-1-2(A)(1) and (3) NMSA 1978.

This decision maker has no quarrel with the concept that jurisdiction to tax must

exist with respect to the imposition of tax by a government and it is beyond cavil that

jurisdiction to tax is an issue which can be raised in defense against any assessment of

tax. That does not resolve, however, the issue of who has the burden of proof with

respect to jurisdiction to tax.

Section 7-1-17(C) NMSA 1978 is the provision of the Tax Administration Act

which provides for the presumption of correctness of tax assessments issued by the

Department. It states simply that, “any assessment of taxes or demand for payment made

by the department is presumed to be correct.” The language is quite broad. It contains no

language which would limit the presumption to the amount of tax, but not the basis for

imposition of tax. Dr. Nelson’s argument would have us read language into the statute

which the legislature did not enact. This, courts should not do, especially when the

statute makes sense as written. Burroughs v. Board of County Commissioners of

Bernalillo County, 88 N.M. 303, 540 P.2d 233 (1975). Thus, a reasonable interpretation

of § 7-1-17(C) is that Dr. Nelson bears the burden of proving his allegation of lack of

jurisdiction to impose tax under both of the tax programs at issue.

THE GROSS RECEIPTS TAX ASSESSMENT WAS PROPER

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Dr. Nelson’s first defense to the imposition of gross receipts tax upon his receipts

from performing chiropractic services in New Mexico is that there is no provision in the

New Mexico statutes which requires him to be registered to report and pay such taxes.1

In making this argument, Dr. Nelson relies upon § 7-10-4 of the Gross Receipts Tax

Registration Act, §§ 7-10-1 to 7-10-5 NMSA 1978, which provides:

Any person leasing or selling property to the state or
performing services for the state, as those terms are used in
the Gross Receipts and Compensating Tax Act, shall be
registered with the department to pay the gross receipts tax
unless that person has no business location, employees or
property in New Mexico and does not conduct business in
New Mexico through agents or contractors. (emphasis
added).

Dr. Nelson argues that this is the only provision of state law which imposes a

requirement to register and pay gross receipts taxes. Since he does not lease or sell

property to the state nor perform services for the state, there is no provision of law

requiring him to register and pay gross receipts taxes on his receipts from performing

chiropractic services.

It is not disputed that the Gross Receipts Tax Registration Act does not apply to

Dr. Nelson. Section 7-10-2 provides that the purpose of the act, “is to ensure that all

persons doing business with the state,...are registered with the department for payment of

the gross receipts tax.” (emphasis added). Because Dr. Nelson does not do business with

the state, the act would not apply to him.

1
Although the Department’s assessment of gross receipts tax was a provisional assessment based upon
estimates of the amount due because Dr. Nelson failed report his own taxes and declined to make his books
and records available to the Department in the course of these proceedings, Dr. Nelson waived his right to
dispute the amount of the Department’s assessment of tax when he refused to comply with the Order of this
hearing officer to provide information which would have assisted in determining a more accurate amount of
tax.

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Dr. Nelson errs, however, when he argues that there is no other provision of state

law requiring that he be registered to pay gross receipts taxes. Section 7-1-12(A) of the

Tax Administration Act, which, as noted above, applies to taxes administered under the

Gross Receipts and Compensating Tax Act, provides as follows:

The director by regulation shall establish a system for the
registration and identification of taxpayers and shall require
taxpayers to comply therewith.

Pursuant to the authority granted by Section 7-1-12, the Secretary has promulgated

regulation 3 NMAC 1.1.15.1 which provides as follows:

The secretary shall cause to be developed and maintained
multiple systems for the registration and identification of
taxpayers who are subject to taxes or tax acts listed in
Section 7-1-2 and taxpayers shall comply therewith. The
systems shall include application forms combining tax
programs whenever feasible. The systems shall include an
identification number for each individual taxpayer using a
state assigned number, federal social security number,
federal employer identification number or a combination of
these numbers for cross-reference purposes. The systems
shall be devised to facilitate the exchange of information
with other states and the United States, and to aid in
statistical computations. Nothing contained in Section 7-1-
12 precludes the secretary from utilizing electronic data
processing programs to manage registration and
identification systems. (emphasis added).

Because the Gross Receipts and Compensating Tax Act is a tax act listed in Section 7-1-

2, this regulation applies to taxpayers under that tax program and requires their

compliance with the Department’s registration system for that tax program. That such a

system exists cannot be disputed by Dr. Nelson. At one time, he was registered and paid

tax under that system. It was only his own action to retire his identification number

which removed him from the system.

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It should also be noted that not only is Dr. Nelson required to be registered

pursuant to the Department’s registration system, he is also subject to the imposition of

gross receipts tax when he engages in the business of performing chiropractic services in

New Mexico. This is because § 7-9-4 NMSA 1978 imposes an excise tax referred to as

the gross receipts tax upon the gross receipts of any person engaging in business in New

Mexico for the privilege of engaging in business. Engaging in business is broadly

defined at § 7-9-3(E) to mean, “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” Gross receipts are defined, among other things,

to be the amount of money received from performing services in New Mexico. § 7-9-

3(F). Because Dr. Nelson had gross receipts from performing chiropractic services in

New Mexico during the periods assessed, he was subject to tax.

Dr. Nelson’s next argument is based upon the fact that the gross receipts tax is an

excise tax imposed upon the privilege of engaging in business. Dr. Nelson asserts that if

he were a corporation, which had been granted a privilege by the government in the form

of being granted the rights associated with incorporation, that the government would have

the right to impose a tax on the privilege of engaging in business as a corporation. As a

citizen, however, Dr. Nelson argues that he has not requested, obtained or exercised any

privilege granted by the government and thus, he cannot be taxed for the exercise of any

privilege. This argument is without merit. Both individual citizens as well as

corporations can be granted the privilege of engaging in business in New Mexico. This

argument is so meritless, that it has never even been argued before with respect to New

Mexico’s gross receipts tax. The identical argument has, however, been raised by those

in the tax protester movement with respect to the imposition of federal income taxes, and

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has been uniformly rejected. As stated by the court in Lovell v. U.S., 755 F. 2d 517, 519

(7th Cir., 1984), “[A]ll individuals, natural or unnatural, must pay federal income tax on

their wages, regardless of whether they received any ‘privileges’ from the government.”

In a related argument, Dr. Nelson argues that the right of a citizen to pursue his

chosen calling is such a fundamental right that the government cannot impose a charge on

the enjoyment of such a right. In support of this argument, Dr. Nelson cites to Butcher’s

Union, ETC., Co. v. Crescent City, Etc. Co, 111 U.S. 746 (1884), and Murdock v.

Commonwealth of Pennsylvania, 319 U.S. 105 (1943). These cases cannot be read so

broadly as Dr. Nelson does. The Butcher’s Union case involved whether the Louisiana

legislature could grant, in perpetuity, a monopoly which could not be altered by future

legislatures. In a concurring opinion, Justice Bradley, in dicta, wrote that the state may

not completely prohibit a person from pursuing his calling, which is what was involved

in that case because the grant of the monopoly acted to prohibit the other slaughter house

from engaging in that business. It made no statement about the state being able to

condition the exercise of such a privilege, which the law allows. The Murdock case

makes clear that the imposition of a tax does not necessarily act impermissibly upon the

exercise of constitutionally protected right. That case involved a challenge to a municipal

ordinance which required persons soliciting orders for goods or merchandise acquire a

business license to do so. The ordinance was challenged by a religious group distributing

religious literature as violating its first amendment rights to the free exercise of religion

and freedom of speech.2 The Court stated:

2
These rights are explicitly recognized in the Constitution and, arguably, are entitled to far greater
protection than the right to pursue one’s calling, which is not mentioned in the Constitution at all.

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We do not mean to say that religious groups and the press
are free from all financial burdens of government. See
Grosjean v. American Press Co., 297 U.S. 233, 250. We
have here something quite different, for example from a tax
on the income of one who engages in religious activities or
a tax on property used or employed in connection with
those activities. It is one thing to impose a tax on the
income or property of a preacher. It is quite another thing
to exact a tax from him for the privilege of delivering a
sermon.

Id., 319 U.S. at 112. Thus, it is clear that not all forms of taxation which affect the

exercise of even the most fundamental of constitutional rights are prohibited. Far more

pertinent to the inquiry at bar, the allegation that the government may not impose a tax on

the privilege of engaging in business, are the numerous federal income tax cases which

have upheld the imposition of an excise tax in the form of the federal income tax on the

income generated from engaging in business. With respect to the right to engage in

business, which is what New Mexico’s gross receipts tax is imposed upon, it has long

been established in the law that the government may impose an income tax upon income

from engaging in business. Flint v. Stone Tracy Co., 220 U.S. 107 (1911), Brushaber v.

Union Pacific Railroad, 240 U.S. 1, (1916). Thus, there is no constitutional prohibition

to imposition of New Mexico’s gross receipts tax upon the privilege of engaging in

business in New Mexico.

Dr. Nelson’s final argument with respect to the gross receipts tax assessed is that

he is not doing business under the name and tax identification number that the assessment

was issued under, since he retired both of them in 1992, and so the assessment does not

apply to him. This argument is also without merit. Dr. Nelson retired his tax number

under the erroneous belief that he was not subject to gross receipts tax. He continued to

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engage in business, however. The Department had the option of creating a new tax

identification number for Dr. Nelson or of using the old, erroneously retired number. In

either case, especially since Dr. Nelson operates as a sole proprietor, Dr. Nelson is the

person who is liable for the assessment of tax, no matter which name is given or which

identification number is attached to the assessment.

DR. NELSON IS SUBJECT TO NEW MEXICO PERSONAL INCOME TAX

Prior to discussing Dr. Nelson’s arguments as to why he is not subject to income

tax on his earnings from performing chiropractic services in New Mexico, an

examination of New Mexico’s personal income tax statutes and their operation will be

useful. 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 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, § 7-2-2(B) NMSA 1978. 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, §§ 7-2-2(N) and 7-2-3 NMSA 1978.

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The Internal Revenue Code, hereinafter, "Code", defines federal adjusted gross

income to be gross income, less certain deductions which are listed in Section 62 of the

Code. Gross income is defined quite broadly 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)(emphasis added).

Dr. Nelson first argues that he is not subject to New Mexico personal income tax

because it is imposed upon New Mexico residents. He characterizes himself as a citizen, a

category which he argues to be a completely different in both character and standing than

that of a resident. In his mind, the categories are mutually exclusive and the fact that the

legislature did not choose to include citizens among those upon whom the income tax is

imposed is dispositive of his liability for tax.

While the concepts of citizenship and residency are not exactly the same, the logical

fallacy of Dr. Nelson’s argument is to assume that because they are not exactly the same,

that they are mutually exclusive. I have not located a provision of the New Mexico

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Constitution or a New Mexico statute which defines citizenship for purposes of determining

what is required to be a citizen of New Mexico. Black’s Law dictionary defines a citizen as

follows:

One who, under the Constitution and laws of the United
States, or of a particular state, is a member of the political
community, owing allegiance and being entitled to the
enjoyment of full civil rights.

Thus, citizenship is broadly defined to encompass members of a political community. One

of the ways we, as a society, determine who belongs to a given political community is to

look to whether they reside within that community. Thus, residents are often also citizens

of a political community and the terms are not mutually exclusive. The definition of

resident for purposes of the Income Tax Act adopts the common law approach to residency

which ties the concept to domicile. A “resident” is defined for income tax purposes at § 7-

1-2 (S) NMSA 1978 as follows:

‘resident’ means any individual who is domiciled in this state
during any part of the taxable year; but any individual who,
on or before the last day of the taxable year, changed his
place of abode to a place without this state with the bona fide
intention of continuing actually to abide permanently without
this state is not a resident for the purposes of the Income Tax
Act.

Regulation 3 NMAC 3.1.9.2 defines a domicile as follows:

A domicile is a place of a true, fixed home and a permanent
establishment to which one intends to return when absent
and where a person has voluntarily fixed habitation of self
and family with the intention of making a permanent home.

Essentially, a resident of New Mexico is a person who has made New Mexico a permanent

home. Residency may encompass individuals who are not necessarily citizens. For

instance, there may be foreign nationals who are neither citizens of the United States or

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New Mexico, but who are residents of New Mexico because they have made it their

permanent home. In spite of the fact that they are not citizens, they are subject to income

taxation in New Mexico upon their income earned in New Mexico. Dr. Nelson’s fallacy is

to assume that because he is a citizen of New Mexico, he cannot also be a resident of New

Mexico. It is clear from the evidence in this case that he is a resident. He has made New

Mexico his permanent place of abode since 1988. He has voted here. He has a New

Mexico driver’s license. He maintains a place of business here. Because he is a resident,

and because the personal income tax is imposed upon residents with income earned in New

Mexico, Dr. Nelson is subject to income taxation by the state of New Mexico.

Dr. Nelson next argues that he had no federal adjusted gross income, which is the

starting point under New Mexico’s personal income tax system for calculating New Mexico

income tax, and therefore, he owes no New Mexico income taxes. He refers to the federal

definition of gross income from 26 U.S.C. § 61, quoted above, which, under subsections 1

through 15 list various “items” of income. First, he argues that since it does not specifically

mention “income from doing business in New Mexico”, that his income would not be

included in the definition. This argument is completely without merit. As noted above, the

federal definition of gross income is worded quite broadly. It includes, among other things,

“(1) compensation for services” and “(2) gross income derived from business.” 26 U.S.C. §

61. Dr. Nelson’s income falls easily under either of the two categories without straining any

interpretation of commonly used English language. The Congressional intent that the

language be construed broadly, rather than restrictively, as Dr. Nelson argues is required, is

apparent from the wording that states that the listing of items of income includes, “(but is

not limited to)” the items listed.

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Dr. Nelson’s next argument focuses on the language in § 61 of the Code which

refers to the listed types of income as “items” of income. Dr. Nelson argues that to

determine whether the items of income are taxable, one must determine whether their

source was a taxable source. For this, he states that we must refer to 26 CFR 1.861-8(f),

which is a regulation promulgated to implement § 861 of the Code. Section 861 of the code

is part of Subchapter N, Part 1 of the code, entitled “Source Rules and Other General Rules

Relating to Foreign Income” and it specifically deals with income from sources within the

United States. Dr. Nelson argues that since his income wasn’t from a source listed in the

regulation at 26 CFR 1.861-8(f), that his income is not taxable. While reading and

interpreting the Internal Revenue Code and its implementing regulations is quite confusing,

Dr. Nelson’s argument is wrong, once again. Subsection (f) of the regulation 26 CFR

1.861-8, is one part of more than 100 pages of the regulation implementing § 861 of the

Code, and it references “other miscellaneous matters”. The fact that it doesn’t list the

source of Dr. Nelson’s income is hardly dispositive of this matter. This is especially true,

since the statute itself, § 861 of the Code, specifically lists as income from sources within

the United States, “compensation for labor or personal services performed in the United

States” under § 861(a)(3), a category which clearly encompasses Dr. Nelson’s income. The

reality is that Dr. Nelson’s income was derived wholly from sources within the state of New

Mexico, which is within the territorial boundaries of the United States. As such, it was

included in federal gross income under either § 61 or § 861 of the Code and is subject to

federal income taxation and therefore New Mexico personal income taxation.

Dr. Nelson’s last argument is based upon his allegation that he had no federal

adjusted gross income which would require him to file a federal return, and New Mexico

18
only requires those with a federal filing requirement to file a state return. See, § 7-2-12

NMSA 1978. While it is not disputed that those with a federal filing requirement must file

a New Mexico personal income tax return, Dr. Nelson has not proven that he has no federal

filing requirement. As indicated in the discussion above, his income from rendering

chiropractic services falls within the definition of federal adjusted gross income. While

those with income below a certain threshold are not required to file federal returns, Dr.

Nelson has not established that his income was below that threshold. Therefore, he has

failed in his burden of proof on this issue.

With respect to this issue, Dr. Nelson also relies upon the fact that he sent the

Internal Revenue Service or the Department of the Treasury a copy of the affidavit he filed

in the records of Bernalillo County which put the Internal Revenue Service on notice of his

position that he is not subject to or liable for federal income taxes and he gave the IRS time

to respond and rebut his assertions, which they failed to do. Essentially, he argues that this

proves that he is not liable for federal income tax and thus would have no requirement to

file or pay state taxes. It proves nothing of the sort. All it proves is that the IRS did not

respond. It does not prove the truth of his position. This argument is basically an argument

that the IRS would be estopped from taking a position to the contrary. Estoppel against the

government is highly disfavored, however, especially when the government is acting in its

sovereign capacity performing governmental functions. Muckey v. N.M. Department of

Human Services, 102 N.M. 265, 694 P.2d 521 (Ct. App. 1985).

Although Dr. Nelson’s arguments with respect to the imposition of income tax have

failed, after the hearing it was determined that Dr. Nelson had, in fact, filed New Mexico

personal income tax returns for 1989 and 1990 and the record was supplemented with those

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returns. Because the Department’s assessments for those years were estimates, and because

those returns were filed before Dr. Nelson had his epiphany that he was not required to

report or pay taxes to New Mexico, I find them to be competent and reliable evidence of Dr.

Nelson’s true liability for those tax years. For this reason, he has overcome the presumption

of correctness with respect to the assessment of income tax for tax years 1989 and 1990 and

the Department will be ordered to abate Assessment Nos. 691910 and 691911 in their

entirety.

THE DEPARTMENT FAILED TO MEET ITS BURDEN OF PROOF WITH
RESPECT TO THE IMPOSITION OF PENALTY FOR FAILURE TO PAY TAX
WITH INTENT TO DEFRAUD

The Department assessed a fifty percent of tax penalty, pursuant to § 7-1-69(C)

NMSA 1978 (1996 Supp.). This section imposes a penalty for “failure, with intent to

defraud the state, to pay when due any amount of tax required to be paid....” Because this

section only imposes a penalty for failure to pay tax when it is done “with intent to defraud

the state”, the ordinary burden of proof, which is on a taxpayer, is shifted to the Department

to prove the taxpayer’s fraudulent intent. In this case, I do not believe that burden was met.

Although Dr. Nelson’s arguments were not persuasive, I was not convinced that he did not,

himself, believe them to be reasonable arguments. Perhaps most persuasive of Dr. Nelson’s

belief in the soundness of his arguments was his insistence on litigating this case solely on

the merits of the issues he raised, which went only to the propriety of the imposition of tax

and not to the amounts assessed. It is possible in the world of law to make arguments which

are made in the alternative and are facially in opposition to each other. Dr. Nelson could

have presented evidence to rebut the presumption of correctness as to the amount of tax

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assessed and still also argued that no tax was due whatsoever on the theories he did present,

had he responded to the Department’s discovery requests to ascertain his true amounts of

gross receipts and taxable income. Yet, he believed sufficiently in the strength of his

arguments that he relied upon them entirely for his defense in this case. He will pay a

sufficient price, in terms of a tax liability which is higher than it might have been had actual

financial records been produced to establish actual income and receipts, such that the

imposition of penalty is not warranted. He now has reason to know, however, that those

arguments are without merit and, unless this decision is appealed and overturned, he will

not be able to continue to act upon those arguments without risking the imposition of a

fraud penalty. In this regard, there is a plethora of authority upholding the constitutionality

and legality of the imposition of the federal income tax, beginning with the Brushaber v.

Union Pacific Railroad case, cited previously. I would urge him to read that case and

others, such as Coleman v. Commissioner of Internal Revenue, 791 F.2d 68 (7th Cir.

1986) and the many other cases cited therein. I would also ask him to examine this

question. If the arguments about the unconstitutionality and illegality of the federal income

tax are sound, why is it that he could not cite to a single case which has directly addressed

these issues with respect to the imposition of federal income tax and which upheld these

arguments? Could it be that the legal arguments propounded by the tax protester movement

are motivated more by self interest than by sound legal reasoning which has been

recognized and adopted by the courts? Dr. Nelson struck me as an intelligent and sincere

man. I would suggest that he has been sold a bill of goods by those in the tax protest

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movement. I hope he takes another look at these issues and what is at risk should he

continue to pursue this course of action.3

CONCLUSIONS OF LAW

1. Dr. Nelson filed timely, written protests to Assessment Nos. 2115295 and

691910-691916 pursuant to § 7-1-24 NMSA 1978, and jurisdiction lies over both the parties

and the subject matter of these protests.

2. Dr. Nelson is required by the provisions of § 7-1-12 NMSA 1978 and the

regulations promulgated thereunder to register to report and pay gross receipts tax upon his

receipts from engaging in business in New Mexico.

3. Dr. Nelson has the burden of proving the Department’s lack of jurisdiction to

impose tax upon him in defense to any assessment of tax.

4. Dr. Nelson is subject to gross receipts tax on his receipts from the privilege of

engaging in the business of performing chiropractic services in New Mexico.

5. New Mexico may constitutionally impose a tax on the privilege of engaging in

business in New Mexico.

6. Dr. Nelson failed to overcome the presumption of correctness of Assessment

2115295, except insofar as the penalty portion of the assessment was not subject to the

presumption of correctness.

3
Nothing said herein is intended to dissuade Dr. Nelson from appealing this decision, should he continue
to believe that this decision erroneously applies the law. Indeed, that will be Dr. Nelson’s obligation should
he not wish to abide by the consequences of this decision.

22

7. Dr. Nelson is liable for Assessment 2115295 even though he retired the

identification number under which the assessment was issued.

8. Dr. Nelson was a resident of New Mexico during tax years 1989-1995 and as

such, was subject to the imposition of New Mexico personal income tax on income earned

from performing chiropractic services in New Mexico during those years.

9. Dr. Nelson overcame the presumption of correctness with respect to the

assessment of personal income taxes for tax years 1989 and 1990 and Assessment Nos.

691910 and 691911 should be abated.

10. Dr. Nelson had federal adjusted gross income from the performance of

chiropractic services in New Mexico during tax years 1991-1995 and therefore is subject to

New Mexico personal income tax for those years.

11. Dr. Nelson failed to meet his burden of proving that he had no filing

requirement for federal income taxes for tax years 1991-1995.

12. Dr. Nelson failed to overcome the presumption of correctness of Assessment

nos. 691912 through 691916, except with respect to the assessment of penalty to which the

presumption of correctness did not apply.

13. The Department has the burden of proving that the 50% fraud penalty imposed

pursuant to § 7-1-69(C) NMSA 1978 (1996 Supp.) was warranted in this case.

14. The Department failed to meet its burden of proving that Dr. Nelson failed to

pay tax with an intent to defraud the state of New Mexico and the penalty assessment

should be abated.

For the following reasons, Dr. Nelson’s protest IS HEREBY GRANTED IN PART

AND DENIED IN PART. THE DEPARTMENT IS HEREBY ORDERED TO ABATE

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ASSESSMENT NOS. 691910 AND 691911 IN THEIR ENTIRETY AND TO ABATE

THE PENALTY PORTION OF ASSESSMENT NOS. 691912 THROUGH 691916 AND

ASSESSMENT NO. 2115295.

DONE, this 10th day of April, 1998.

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