Can a New Mexico resident avoid state income tax with tax-protester theories — that wages paid in federal reserve notes are exempt, that the Sixteenth Amendment was never ratified, or that wages are not income?

Subject

Nestor & Emmeline-Dorothy Padilla (D&O 99-23)

Plain-English summary

In December 1998 the Taxation and Revenue Department assessed Nestor Padilla New Mexico personal income tax, penalty, and interest for tax years 1995, 1996, and 1997, and filed a tax lien to secure the three assessments. The Padillas protested, but not on ordinary grounds — their letters and affidavits asserted a series of tax-protester theories, including that their hearing notice was "Refused for Fraud" and that they would not enter a "STATE-FICTION-JURISDICTION UNDER A FOREIGN-YELLOW-FRINGED FLAG."

When the hearing date came, the Padillas did not appear. That alone decided the case. Under Section 7-1-17(C) NMSA 1978, a Department assessment is presumed correct, and the taxpayer carries the burden to come forward with evidence and overcome that presumption. By not showing up to present any evidence, the Padillas failed to meet their burden, so the income-tax assessments (and the accrued interest) and the lien securing them were upheld.

The Hearing Officer went further and addressed the Padillas' written arguments "in order to provide some guidance" — and rejected every one:

• "Wages paid in federal reserve notes can't be taxed." Mr. Padilla cited statutes making federal reserve notes obligations of the United States (12 U.S.C. Section 411) and exempting U.S. obligations from state tax (31 U.S.C. Section 3124(a)). But he overlooked 31 U.S.C. Section 5154, which expressly lets a state "tax United States coins and currency (including Federal reserve notes)... as money." The Supreme Court confirmed in Smith v. Davis that Congress removed the old bar on state taxation of legal-tender notes back in 1894.
• The classic tax-protester menu. The Sixteenth Amendment was never ratified; "sovereign citizens" are outside U.S. and state jurisdiction; "income" means only gain from capital, not pay for labor; the income tax is voluntary; the Internal Revenue Code is not positive law; and so on. The Hearing Officer quoted a long line of federal cases (from In re Becraft to Lonsdale v. United States) holding each argument "frivolous" and "completely lacking in legal merit."

Importantly, the Department had already withdrawn its 50% civil-fraud penalty before the hearing. It did so because the Padillas had told the Department in advance they intended to stop filing, and there was no evidence they did not genuinely believe their theories. But the decision puts them on notice: now that a Hearing Officer has told them the arguments have no merit, continuing to rely on them going forward could expose them to fraud penalties.

What this means for you

• Tax-protester theories lose — reliably. New Mexico and federal courts have rejected every argument in the "wages aren't income / Sixteenth Amendment / sovereign citizen / income tax is voluntary" family. Building a filing position on them does not save tax; it just adds penalties and interest.
• Show up to your hearing. A Department assessment is presumed correct. If you protest but then fail to appear and put on evidence, you lose by default — the presumption alone establishes your liability. The same is true for a protest to a tax lien.
• States can tax wages paid in dollars. The fact that wages are paid in federal reserve notes changes nothing. Federal law (31 U.S.C. Section 5154) specifically authorizes states to tax U.S. currency as money.
• A dropped fraud penalty is not a green light. Here the 50% penalty was abated only because the couple appeared to hold a sincere (if baseless) belief. Once a taxpayer has been formally told the theory is wrong, that good-faith cover disappears and fraud penalties can attach on the next round.

Key questions answered

Why did the Padillas lose without the Hearing Officer even weighing their evidence?
Because they presented none. They filed a protest but did not appear at the hearing. Under Section 7-1-17(C) NMSA 1978 the assessment is presumed correct, and Archuleta v. O'Cheskey puts the burden on the protesting taxpayer to overcome that presumption. No appearance, no evidence, no rebuttal — so the assessments and interest stood.

Aren't wages paid in federal reserve notes exempt because U.S. obligations can't be taxed by a state?
No. While U.S. obligations are generally exempt from state tax, Congress carved out currency: 31 U.S.C. Section 5154 lets states tax federal reserve notes and other U.S. coins and currency "as money on hand or on deposit." The Supreme Court noted this change in Smith v. Davis.

Was the Sixteenth Amendment really never ratified, or are wages not "income"?
Courts have rejected both claims for decades. The decision cites cases holding the Sixteenth Amendment valid and holding that compensation for labor is reportable gross income. These are treated as frivolous positions, not open questions.

Why did the Department drop the fraud penalty if the arguments were baseless?
Because the 50% civil-fraud penalty turns on intent. The Padillas had notified the Department of their intent to stop filing and appeared to genuinely (if wrongly) believe their theories, so the Department could not show the fraudulent intent the penalty requires. The decision warns that once they know the theories are meritless, that defense is gone.

Verbatim citations

The presumption of correctness and the taxpayer's burden:

There is a statutory presumption that the Department's assessment of tax is correct. Section 7-1-17(C) NMSA 1978.... To be successful, anyone challenging an assessment must clearly overcome this presumption.... Having failed to appear and present evidence in support of their protests, the Padillas have not met their burden of proof in this case....

States may tax federal reserve notes:

A State or a territory or possession of the United States may tax United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) as money on hand or on deposit in the same way and at the same rate that the State, territory, or possession taxes other forms of money.

On the tax-protester movement (quoting Coleman v. Commissioner):

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.... The government may not prohibit the holding of these beliefs, but it may penalize people who act on them.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Nestor & Emmeline-Dorothy Padilla
• Decision PDF: D&O 99-23

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTESTS OF
NESTOR & EMMELINE-DOROTHY PADILLA No. 99-23
ASSESSMENT NOs. 98066, 98067 and 98608
TAX LIEN NO. 93523

DECISION AND ORDER

A formal hearing on the above-referenced protest was scheduled for June 24, 1999, before

Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department was represented by

Monica M. Ontiveros, Special Assistant Attorney General. Nestor and Emmeline-Dorothy Padilla

failed to appear at the hearing. Based upon the evidence in the record, IT IS DECIDED AND

ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On December 4, 1998, the Department issued the following personal income tax

assessments to Nestor Padilla:

Assessment Tax Year Tax Penalty Interest Total

No. 98066 1995 $120.00 $60.00 $46.50 $226.50
No. 98067 1996 $125.00 $62.50 $29.69 $217.19
No. 98608 1997 $173.00 $86.50 $15.14 $274.64

2. On December 10, 1998, the Department mailed the Padillas a Notice of Claim of Tax

Lien No. 93523, claiming a lien upon the property of Nestor and Emmeline D. Padilla for payment of

Assessments 98066, 98067 and 98608.

3. On December 14, 1998, Nestor Padilla sent the Secretary of the Department a letter

that disputed the validity of the Department's assessments and included a "Request For Rights At

Law and Hearing/Administrative Appeal to the Director."

4. On December 15, 1998, Mr. Padilla sent the Department a document entitled "Claim

for Release of Erroneous Notice of Lien/Levy" disputing the validity of the tax lien and demanding

"an Adjudicatory Appeal Office Hearing."

5. On May 20, 1999, counsel for the Department filed a Request for Hearing on Mr.

Padilla's protests to Assessments 98066, 98067, 98608 and Tax Lien No. 93523.

6. On May 25, 1999, the Hearing Officer sent Mr. and Mrs. Padilla a letter by certified

mail, return receipt requested, notifying them that a hearing on their protests was scheduled for June

24, 1999.

7. On June 8, 1999, Mr. and Mrs. Padilla returned the notice of hearing marked

"Refused for Fraud" and sent the Hearing Officer an affidavit stating, among other things:

"AFFIANTS DO-NOT ACCEPT THE INVITATION OF THE ENTERING INTO A FOREIGN:

STATE-FICTION-JURISDICTION UNDER A FOREIGN-YELLOW-FRINGED FLAG, SUCH AS

THE 'STATE OF NEW MEXICO', WHERE ONE IS GUILTY UNTIL PROVEN INNOCENT."

8. On June 24, 1999, the date of the hearing, Department counsel submitted a letter

notifying the Hearing Officer that the Department was withdrawing its assessment of the fifty-

percent civil fraud penalty shown on Assessments 98066, 98067 and 98608. The Department's

decision to abate the fraud penalty was based on its discovery of several documents the Padillas

submitted prior to the date of the assessments notifying the Department of their intent not to pay

income tax and their belief that the tax was unconstitutional.

9. The Padillas did not appear at the June 24, 1999 hearing scheduled on their protests.

DISCUSSION

There is a statutory presumption that the Department’s assessment of tax is correct. Section 7-

1-17(C) NMSA 1978; Mears v. Bureau of Revenue, 87 N.M. 240, 241, 531 P.2d 1213, 1214 (Ct. App.

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1975). To be successful, anyone challenging an assessment must clearly overcome this presumption.

Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Having failed to appear

and present evidence in support of their protests, the Padillas have not met their burden of proof in this

case and have not overcome the presumption of correctness that attaches to the Department’s

assessments of personal income tax and accrued interest.

As the party protesting the Department’s tax lien, it is also the Padillas' burden to present

evidence that the Department’s action in filing the lien was incorrect. By failing to appear and

present evidence in support of their protest, the Padillas have failed to demonstrate that the lien was

improper under the law.

Although the Padillas' failure to appear at the hearing is sufficient to support entry of a

decision in favor of the Department, I will briefly address the arguments raised in Mr. Padilla's

protest letter in order to provide some guidance to the Padillas and give them notice of the

Department's position concerning their belief that they are not liable for payment of personal income

tax.

Obligations of the Federal Government are Exempt from State Taxation. Mr. Padilla

maintains that because his wages are paid in federal reserve notes, which are federal obligations, his

wages are not subject to tax by New Mexico. In support of his argument, Mr. Padilla cites to 12

U.S.C. § 411, which states that federal reserve notes "shall be obligations of the United States" and

31 U.S.C. § 3124(a), which states that "[s]tocks and obligations of the United States Government are

exempt from taxation by a State or political subdivision of a State...." Mr. Padilla overlooks 31

U.S.C § 5154, which gives states express permission to tax federal reserve notes:

§ 5154. State Taxation
A State or a territory or possession of the United States may tax United
States coins and currency (including Federal reserve notes and circulating
notes of Federal reserve banks and national banks) as money on hand or on

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deposit in the same way and at the same rate that the State, territory, or
possession taxes other forms of money.

In Smith v. Davis, 323 U.S. 111, 114, 65 S.Ct. 157, 159 n.4 (1944), the United States Supreme Court

noted that while state taxation of legal tender notes was once prohibited, this was changed by

Congress's 1894 enactment of what is now 31 U.S.C § 5154. See also, Hibernia Savings & Loan

Society v. San Francisco, 200 U.S. 310, 26 S.Ct. 265, 267 (1906). The fact that Mr. Padilla's wages

are paid in the form of federal reserve notes does not prevent New Mexico from imposing a personal

income tax on those wages.

Tax Protester Arguments. Mr. Padilla raises several other arguments in support of his

position that he is not subject to personal income tax, including the following: (1) the Constitution

prohibits Congress from imposing a direct, nonapportioned tax on individuals; (2) the Sixteenth

Amendment was never properly ratified; (3) the Padillas are sovereign citizens not subject to the

jurisdiction of the United States or the State of New Mexico; (4) the term "income" includes gain or

profit from capital, but does not include compensation for labor; (5) the income tax applies only to

people exercising corporate or governmental privileges; (6) payment of income tax is voluntary; (7) it

is a violation of the Padillas' Fourth and Fifth Amendment rights to require them to file income tax

returns; (8) the Internal Revenue Code is not positive law; (9) the tax laws do not define who is

liable for tax and are unconstitutionally vague and indefinite. All of these arguments—which are

attributable to what is generally known as the tax protester or tax resister movement—have been

soundly rejected by both federal and state courts. I direct Mr. Padilla's attention to the following cases:

In re Becraft, 885 F.2d 547, 548 (9th Cir. 1989): "For over 75 years, the Supreme Court and the

lower federal courts have both implicitly and explicitly recognized the Sixteenth Amendment's

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authorization of a non-apportioned direct income tax on United States citizens residing in the United

States and thus the validity of the federal income tax laws as applied to such citizens."

Betz v. United States, 40 Fed.Cl. 286, 295 (1998): "Despite plaintiff's and numerous other tax

protesters' contention that the Sixteenth Amendment was never ratified, courts have long recognized the

Sixteenth Amendment's ratification and validity."

United States v. Sloan, 939 F.2d 499, 500-501 (7th Cir. 1991), cert. denied, 502 U.S. 1060

(1992): "Also basic to Mr. Sloan's 'freedom from income tax theory' is his contention that he is not a

citizen of the United States, but rather, that he is a freeborn, natural individual, a citizen of the State of

Indiana, and a 'master'—not 'servant'—of his government. As a result, he claims that he is not subject

to the jurisdiction of the laws of the United States. This strange argument has been previously rejected

as well.... Mr. Sloan's proposition that he is not subject to the jurisdiction of the laws of the United

States is simply wrong."

Lovell v. United States, 755 F.2d 517, 519 (7th Cir. 1984): "Plaintiffs argue first that they are

exempt from federal taxation because they are 'natural individuals' who have not 'requested, obtained or

exercised any privilege from an agency of government.' This is not a basis for an exemption from

federal income tax."

United States v. Lawson, 670 F.2d 923, 925 (10th Cir. 1982): "Notwithstanding Lawson's belief

that his wages are not gains or profits but merely what he has received in an equal exchange for his

services, the Internal Revenue Code clearly includes compensation of this nature within reportable

gross income."

Olson v. United States, 760 F.2d 1003, 1005 (9th Cir. 1985): "This court has repeatedly rejected

the argument that wages are not income as frivolous [citations omitted] and has also rejected the idea

that a person is liable for tax only if he benefits from a governmental privilege."

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United States v. Gerads, 999 F.2d 1255, 1256 (8th Cir. 1993), cert. denied, 510 U.S. 1193

(1994): "Appellants' claim that payment of federal income tax is voluntary clearly lacks substance."

United States v. Schiff, 876 F.2d 272, 275 (2d Cir. 1989): "payment of income taxes is not

optional...the average citizen knows that payment of income taxes is legally required."

United States v. Stillhammer, 706 F.2d 1072, 1076 (10th Cir. 1983): "The Fifth Amendment

does not serve as a defense for failing to make any tax return, and a return containing no information

but a general objection based on the Fifth Amendment does not constitute a return as required by the

Code."

Ryan v. Bilby, 764 F.2d 1325, 1328 (9th Cir. 1985): "Congress's failure to enact a title into

positive law has only evidentiary significance and does not render the underlying enactment invalid or

unenforceable.... Like it or not, the Internal Revenue Code is the law, and the defendants did not

violate Ryan's rights by enforcing it."

Lonsdale v. United States, 919 F.2d 1440, 1448 (10th Cir. 1990): "the following arguments

alluded to by the Lonsdales are completely lacking in legal merit and patently frivolous: (1)

individuals ("free born, white, preamble, sovereign, natural, individual common law 'de jure' citizens

of a state, etc.") are not "persons" subject to taxation under the Internal Revenue code; (2) the

authority of the United States is confined to the District of Columbia; (3) the income tax is a direct

tax which is invalid absent apportionment, ... (4) the Sixteenth Amendment to the Constitution is

either invalid or applies only to corporations; (5) wages are not income; (6) the income tax is

voluntary; (7) no statutory authority exists for imposing an income tax on individuals; (8) the term

"income" as used in the tax statutes is unconstitutionally vague and indefinite; (9) individuals are not

required to file tax returns fully reporting their income;...."

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The above cases represent only a small sampling of the hundreds of federal and state court

decisions rejecting the arguments raised by the tax protester movement. In this case, the Department

withdrew its assessment of the fifty percent civil fraud penalty because the Padillas notified the

Department of their intent to cease filing income tax returns and because there was no evidence they

did not have a genuine belief in the positions they espoused. The Padillas are now on notice, however,

that there is no legal merit to the arguments on which they have relied in failing to report and pay

personal income tax to the state of New Mexico. The Padillas cannot continue to assert they do not

come within the definition of "taxpayers" or are not subject to payment of New Mexico personal

income tax without risking imposition of fraud penalties As the court stated in Coleman v.

Commissioner of Internal Revenue, 791 F.2d 68, 69 (7th Cir. 1986):

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 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).

CONCLUSIONS OF LAW

1. Nestor and Emmeline-Dorothy Padilla filed timely, written protests to Assessment Nos.

98066, 98067, 98608 and Tax Lien No. 93523, and jurisdiction lies over the parties and the subject

matter of this protest.

2. Having failed to appear and present evidence at the hearing set to consider their

protests, the Padillas have failed to meet their burden of showing that the Department's assessments

were incorrect or that the Department's tax lien did not comply with legal requirements.

For the foregoing reasons, the Padillas' protest IS DENIED.

Dated June 29, 1999.

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