A company had refunds coming on some years' returns and an underpayment on others. Can it make the state offset the overpayments against the underpayment to cut the interest it owes?

Subject

CRST, Inc. (D&O 98-49)

Plain-English summary

CRST, Inc. is an interstate trucking company headquartered in Cedar Rapids, Iowa. After auditing its 1992, 1993, and 1994 New Mexico corporation income tax returns, the Department found CRST had underreported and, on November 8, 1996, assessed $5,417 in tax, $541.70 penalty, and $2,215.85 interest.

The wrinkle was that on each of those years' original returns, CRST had actually reported an overpayment — and on each return it chose to apply that overpayment to the next tax year rather than take a refund. It went a step further and treated those carried-forward overpayments as its quarterly estimated tax payments for the following year (which it was required to make under Section 7-2A-9.1). CRST argued that because it had overpaid in each year, those overpayments should be treated as payments for those years and offset against the audit's underpayment, cutting the interest.

Hearing Officer Gerald B. Richardson denied the protest. His reasoning: there was never any money "on deposit" with the Department to apply backward, because CRST had immediately applied each overpayment forward to the next year's estimated taxes. And more fundamentally, the Tax Administration Act gives the Department no power to offset overpayments against past liabilities. Under Section 7-1-29, the Department may only refund an overpayment or credit it against future tax liabilities. The Court of Appeals had already rejected an identical argument in Amoco Production Co. v. Taxation and Revenue Department, holding that "interest on underpayment of taxes is calculated without regard to receipt by the Department of any overpayment of taxes." That ruling controlled, so the interest stood.

What this means for you

• The state can't net your overpayments against a later-discovered underpayment to reduce interest. New Mexico's Tax Administration Act only lets the Department refund an overpayment or credit it to a future year — not sweep it backward against a past-year shortfall. Interest on the underpayment is calculated on its own.
• How you elect to use an overpayment matters. CRST chose on each return to roll its overpayment into the next year's estimated taxes. Once applied that way, the money was gone — it wasn't sitting with the Department available to cover the later audit adjustment.
• Interest compensates the state for time, not fault. Even a taxpayer who overpaid in the same overall period still owes interest on any specific underpayment, because the two are tracked separately. The overpayment doesn't erase the fact the underpaid tax was late.
• This is corporation income tax, but the rule is general. The Amoco holding interprets the Tax Administration Act (Chapter 7, Article 1), which governs most New Mexico taxes — so the same no-backward-offset principle reaches well beyond trucking companies and income tax.

Key questions answered

Why couldn't CRST's overpayments reduce the interest?
Because there was no money "on deposit" to apply. CRST had already elected to apply each year's overpayment forward as its next year's quarterly estimated tax, so nothing remained with the Department to offset against the audit underpayment.

Is there any authority to offset overpayments against past liabilities?
No. Section 7-1-29 authorizes the Department only to refund an overpayment or credit it against future liabilities, not past ones. Absent statutory authority, such offsetting is not allowed.

What case controlled the result?
Amoco Production Co. v. New Mexico Taxation and Revenue Department, which held under the same Tax Administration Act that interest on underpayments is calculated without regard to the Department's receipt of any overpayment.

Did CRST dispute the underlying tax?
No. The only issue was whether the Department correctly calculated the interest in the assessment. The Hearing Officer held it did.

Verbatim citations

The core holding — no authority to offset overpayments against underpayments for interest:

There is no statutory authority for the Department to offset overpayments of tax against underpayments of tax for purposes of the calculation of interest. In the absence of such authority, such offsetting is not allowed.

Why there was no overpayment "on deposit" to apply:

There was no money "on deposit" with the Department to be applied to the tax year for which the overpayment was reported, however, because the Taxpayer applied that money immediately, upon the filing of its returns showing an overpayment, to the payment of quarterly estimated taxes for the following year.

The Amoco rule that governs the calculation of interest:

The court noted that §7-1-29 NMSA 1978 only authorizes the Department to either refund overpayments of tax, or to credit them against future tax liabilities, not past tax liabilities, and held that "interest on underpayment of taxes is calculated without regard to receipt by the Department of any overpayment of taxes." Amoco, supra., 118 N.M. at 76.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: CRST, Inc.
• Decision PDF: D&O 98-49

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
CRST, INC., ID. NO. 02-067509-00 7 NO. 98-49
PROTEST TO ASSESSMENT NO. 2082617

DECISION AND ORDER

This matter comes on for determination before Gerald B. Richardson, Hearing
Officer, based upon a joint stipulation of facts and memoranda of law. CRST, Inc.,
hereinafter, “Taxpayer”, was represented by Ms. Debra Wood, its Tax Supervisor. The
Taxation and Revenue Department, hereinafter, “Department”, was represented by
Monica M. Ontiveros, Special Assistant Attorney General. Based upon the stipulated
facts and arguments of the parties, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a corporation which is headquartered in Cedar Rapids,

Iowa and which operates an interstate trucking operation.

2. The Department audited the Taxpayer for the 1992, 1993 and 1994 and

tax years and determined that the Taxpayer had underreported its corporation income

taxes owing to the Department during those years.

3. As a result of the Department’s audit, the Department issued Assessment

No. 2082617 to the Taxpayer on November 8, 1996, assessing $5,417.00 in corporation

income tax, $541.70 in penalty and $2,215.85 in interest for the 1992 through 1994 tax

years.

4. The amount of underpaid corporation income tax attributable to each of

the tax years was $1,631 for tax year 1992, $2,482 for tax year 1993 and $1,273 for tax

year 1994.

5. On December 4, 1996, the Taxpayer requested an extension of time to file

a protest pursuant to § 7-1-24 (B) NMSA 1978.

6. On December 17, 1996 the Department granted the Taxpayer’s request for

an extension of time, granting until February 1, 1997 for the Taxpayer to file its protest.

7. On January 27, 1997, the Taxpayer filed a protest to Assessment No.

2082617.

8. On September 15, 1993, the Taxpayer filed its 1992 New Mexico

corporation income tax return with the Department. Line 16 on that return indicated that

the Taxpayer had overpaid its 1992 corporation income taxes by $2,436.00. The

Taxpayer had the option of having that amount refunded to it by filling in line 16b, or it

had the option of having the overpayment applied to the 1993 tax year by filling in line

16a. The Taxpayer filled in line 16a, electing to have the overpayment applied to the

1993 tax year.

9. On September 15, 1994, the Taxpayer filed its 1993 New Mexico

corporation income tax return with the Department. Line 17 on that return indicated that

the Taxpayer had overpaid its 1993 corporation income taxes by $11,144. The Taxpayer

had the option of having that amount refunded to it by filling in line 17b, or it had the

option of having that amount applied to the 1994 tax year by filling in line 17a. The

Taxpayer filled in line 17a, electing to have the overpayment applied to the 1994 tax year.

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10. On September 15, 1995 the Taxpayer filed its 1994 New Mexico

corporation income tax return with the Department. Line 20 on that return indicated that

the Taxpayer had overpaid its corporation income taxes in the amount of $4,144.

The Taxpayer had the option of having that amount refunded to it by filling in line 20B,

or it had the option of having that amount applied to the 1995 tax year by filling in line

20A. The Taxpayer filled in line 20A, electing to have the overpayment applied to the

1995 tax year.

11. The tax overpayments were applied by the Department to the following

year liabilities of the Taxpayer. In fact, the Taxpayer ensured that they were applied in

that manner by reporting the overpayments reported on September 15, 1993 and

September 15, 1994 as all or part of its quarterly estimated payments of tax, due on

September 15th of each year, for the 1993 and 1994 tax years. (No information was

provided with respect to the application of the 1994 overpayment to the quarterly

payment of 1995 taxes due on September 15, 1995, but it is assumed that the Taxpayer

handled its payment in the same manner).

DISCUSSION

The issue to be determined is whether the Department properly calculated the

amount of interest in Assessment No. 2082617. The Taxpayer argues that its

overpayments as reported on its 1992, 1993 and 1994 returns should be treated as

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payments for those years, respectively, and applied to the Department’s assessments for

those years, thereby reducing the amount of interest assessed.

The Department argues that the overpayments were applied exactly as the

Taxpayer requested them to be applied, to the Taxpayer’s quarterly estimated tax

payments. The Taxpayer was required to make such payments by the provisions of

§ 7-2A-9.1 NMSA 1978, and if the Taxpayer had failed to make such payments in the

requisite amounts, it would have been subject to the imposition of interest on any

underpayments of estimated taxes. The Department also argues that it had no authority

under the provisions of the tax statutes it administers to apply the overpayments to any

liabilities other than future year liabilities. Finally, the Department argues that Amoco

Production Company v. New Mexico Taxation and Revenue Department, 118 N.M. 72,

878 P.2d 1021 (Ct. App., 1994) supports its position in this matter.

The Department is correct on all three counts. The Taxpayer’s argument assumes

that because there were overpayments reported on its original returns, that the

overpayment was somehow on deposit with the Department and that overpayment could

be applied to the Taxpayer’s later determined underpayment. There was no money “on

deposit” with the Department to be applied to the tax year for which the overpayment was

reported, however, because the Taxpayer applied that money immediately, upon the filing

of its returns showing an overpayment, to the payment of quarterly estimated taxes for the

following year. If quarterly estimated taxes had not paid in sufficient amount and in a

timely manner, there would have been interest applicable to any underpayment of those

taxes. Section 7-2A-9.1(C) NMSA 1978.

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An identical argument to that being made here by the Taxpayer was raised by the

taxpayer in the Amoco case. The only distinction between that case and this one is that in

Amoco, because of the peculiarities of the oil and gas business, the taxpayer did not know

the exact amount of its monthly oil and gas tax liability and so, when it filed its returns, it

estimated its liability. Thus, the original returns did not show either overpayments or

underpayments. It was only later, when the taxpayer filed amended returns that the

overpayments and underpayments were identified. The taxpayer requested offsetting of

its overpayments against the underpayments to reduce the assessment of interest. The

Court of Appeals rejected the taxpayer’s argument that such offsetting was allowed under

the Tax Administration Act, Chapter 7, Article 1, NMSA 1978. That act governs not

only the administration of the oil and gas taxes, but also many other taxes administered by

the department, including the corporation income tax. See, § 7-1-2(A) NMSA 1978. The

court noted that §7-1-29 NMSA 1978 only authorizes the Department to either refund

overpayments of tax, or to credit them against future tax liabilities, not past tax liabilities,

and held that “interest on underpayment of taxes is calculated without regard to receipt by

the Department of any overpayment of taxes.” Amoco, supra., 118 N.M. at 76.

The ruling in the Amoco case governs the determination of the Taxpayer’s protest.

CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2082617

and jurisdiction lies over both the parties and the subject matter of this protest.

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2. There is no statutory authority for the Department to offset overpayments

of tax against underpayments of tax for purposes of the calculation of interest. In the

absence of such authority, such offsetting is not allowed.

For the foregoing reasons, THE TAXPAYER’S PROTEST IS HEREBY

DENIED.

DONE, this 18th day of September, 1998.

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