New Mexico residents worked overseas for the Navy and later thought they had overpaid state income tax. Can they get a refund years afterward — and did they even owe the tax while abroad?

Subject

Fidel and Sadie Ann Avilucea (D&O 99-27)

Plain-English summary

Fidel and Sadie Ann Avilucea were longtime New Mexico residents who, in January 1990, took three-year civilian jobs with the U.S. Navy in Rota, Spain. The Navy withheld federal but no state tax. Worried about a surprise New Mexico tax bill when they came home, they wrote the Department, were told they remained New Mexico residents taxable on their wages, and then conscientiously sent in estimated New Mexico income-tax payments for 1990, 1991, and 1992 (and paid for 1993 after returning). They based their estimates on gross income before deductions, so they probably overpaid.

Years later they concluded they should not have paid at all, and on April 16, 1998 they filed a claim for a $5,519.95 refund covering 1990–1993. The Department denied it as untimely, and the Hearing Officer agreed and denied the protest:

• The refund was time-barred. Section 7-1-26(C)(1)(a) NMSA 1978 allows a refund only if claimed within three years of the end of the calendar year in which the payment was due. New Mexico income tax returns are due April 15 of the following year (Section 7-2-12), so the 1990–1993 returns were due in 1991–1994. A claim filed in April 1998 fell outside the three-year window for every one of those years.
• But the tax was actually owed. The Hearing Officer took pains to explain that the couple's payments were not a mistake. New Mexico taxes the income of every resident, and "resident" turns on domicile — a true, fixed home one intends to return to (Section 7-2-2(S); Regulation 3 NMAC 3.1.9.2; Hagan v. Hardwick). Domicile does not require constant physical presence. Because the Aviluceas kept their Las Cruces home, kept their vehicles registered in New Mexico, and intended to return, they remained New Mexico domiciliaries while in Spain, and their overseas wages were taxable here.

The Hearing Officer commended the couple's "extraordinary, honest and sincere efforts to comply," but could not grant relief the statute of limitations forecloses. The practical lesson: had they brought their deduction records in shortly after returning, a refund of the overpayment could have been claimed in time.

What this means for you

• Refund claims have a hard three-year deadline. Under Section 7-1-26(C)(1)(a), you must claim a New Mexico refund within three years of the end of the calendar year the payment was due. Even a genuine overpayment is lost once that window closes — good faith does not extend it.
• Moving abroad (or out of state) for a job does not end New Mexico residency by itself. Residency follows domicile. If you keep your home, vehicle registration, and intent to return, you stay a New Mexico resident taxable on your income — including income earned overseas.
• Estimated payments still need a real return to true up. The Aviluceas sent money but apparently never filed returns showing deductions, so the Department could not compute or refund the overpayment. File the return with your deductions to fix your actual liability — and to start the refund clock working in your favor.
• If you suspect you overpaid, act quickly. File the refund claim (with support) well inside three years. Waiting until you're "sure" can push you past the deadline for the earliest years.

Key questions answered

Why couldn't the Aviluceas get back money they overpaid?
Because the refund statute of limitations had run. Section 7-1-26(C)(1)(a) requires a claim within three years of the end of the calendar year the payment was due. Their 1990–1993 payments were due 1991–1994; their April 1998 claim was too late for all of them.

Did they actually owe New Mexico tax while living in Spain?
Yes. New Mexico taxes residents on their income, and residency is based on domicile. Keeping their New Mexico home, vehicle registrations, and intent to return made them domiciliaries throughout, so their wages earned in Spain were taxable in New Mexico.

Does domicile require you to be physically in the state?
No. Domicile is a fixed home you intend to return to when absent. You can be temporarily elsewhere — even abroad for years — and remain domiciled in New Mexico if you keep the ties and intent to return.

Could they have done anything differently?
Yes. If they had filed returns showing their deductions shortly after returning in 1993, they could have documented and claimed the overpayment within the three-year period. The problem was timing and missing returns, not the merits of the overpayment.

Verbatim citations

The refund deadline:

no credit of refund of any amount may be allowed of made to any person unless as the result of a claim made by that person as provided in this section: (1) within three years of the end of the calendar year in which: (a) the payment was originally due....

Residency follows domicile:

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.

Why they remained taxable New Mexico residents:

[A]t all times they retained their home in New Mexico, kept their vehicles registered here, and otherwise indicated their intention to return to their home in New Mexico after their tour of duty. As residents of New Mexico, their income was subject to New Mexico income tax even though it was earned while they were in Spain.

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Fidel and Sadie Ann Avilucea
• Decision PDF: D&O 99-27

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
FIDEL G. AND SADIE ANN AVILUCEA, NO. 99-27
PROTEST TO DENIAL OF CLAIM FOR REFUND

DECISION AND ORDER

This matter came on for hearing on September 24, 1999 before Gerald B. Richardson,

Hearing Officer. Mr. and Mrs. Avilucea, hereinafter, “Taxpayers”, represented themselves at the

hearing. The Taxation and Revenue Department, hereinafter, “Department”, was represented by

Javier López, Special Assistant Attorney General. Based upon the evidence and the arguments

presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayers are longtime residents of New Mexico. At all times pertinent to

this matter, they owned a home in Las Cruces and they owned vehicles registered with the State

of New Mexico.

2. In January, 1990, the Taxpayers accepted three year tours of duty in Rota, Spain,

as civilian employees with the United States Department of the Navy.

3. The Department of the Navy withheld federal income withholding tax from the

Taxpayer’s compensation but did not withhold any state taxes.

4. During 1990, the Taxpayers became concerned about whether they would be held

liable for state income tax upon their wage income. They had heard from other overseas federal

employees that other overseas employees had found themselves subject to payment of not only
back taxes, but substantial amounts of interest and penalty when they returned to their stateside

homes from their tours of duty. In order to avoid this potential situation, in July of 1990, the

Taxpayers wrote to the Department explaining their situation and asked for advice with respect to

their responsibilities for New Mexico income tax.

5. On November 2, 1990, Mr. Thomas M. Sharp, an information specialist with the

Department, responded to the Taxpayers’ inquiry. Mr. Sharp informed the Taxpayers that unless

they had decided to make another state their permanent place of residence when they returned

from Spain, that they were still considered to be New Mexico residents. Mr. Sharp’s letter

further explained that as New Mexico residents, they were subject to New Mexico income tax on

their income from employment, even when that employment occurred outside of New Mexico.

6. After receiving the Department’s response, the Taxpayers notified the Finance

Officer for the Department of Navy that they should have New Mexico personal income taxes

withheld from their wages. The Finance Officer informed them that the Department of the Navy

did not withhold any state withholding taxes from the wages of overseas employees.

7. The Taxpayers then wrote Mr. Sharp at the Department and informed him of their

quandry and asked for guidance as to how to estimate how much tax to withhold, pay and report

to the Department themselves.

8. Apparently, the Taxpayers did not receive a response to their inquiry as to how to

determine how much tax to pay to the Department. The Taxpayers also had difficulty obtaining

the New Mexico personal income tax filer’s kit and instructions for reporting income taxes.

9. For the 1990 tax year, the Taxpayer’s wrote the Department, explained their

situation and sent in a payment in the amount of $962.34. The Taxpayer’s letter to the

Department explained that this payment was an estimate of the amount they owed, based upon
what had been withheld from their income during the previous tax year. The Taxpayer’s letter

further requested that the Department inform them if they had overpaid or underpaid taxes.

10. The Taxpayer’s followed a similar procedure for tax years 1991 and 1992. For

tax year 1991 the Taxpayer made payment of $1,636.95 to the Department. For tax year 1992 the

Taxpayer made payment of $1,840 to the Department.

11. Because these transactions occurred such a long time ago, the Department does

not have copies of the correspondence submitted by the Taxpayers or a record of whether actual

returns were submitted, or simply the Taxpayer’s estimated payments.

12. The Taxpayers returned to New Mexico from Spain in August, 1993.

13. In estimating their tax payments, the Taxpayers used their gross income, before

any standard or itemized deductions which they might have claimed, as the basis for calculating

their payments. Because the Taxpayers would have been eligible to claim either a standard or

itemized deduction, undoubtedly, they over paid their income taxes to the Department. Because

the Taxpayers did not produce the information upon which the actual amount of their income tax

liability for tax years 1990 through 1992 could be calculated, it is impossible to determine at this

time the actual amount of their overpayment.

14. After the Taxpayers returned to New Mexico, they reported and paid $1,081 in

personal income taxes to the Department for tax year 1993.

15. Sometime after returning to New Mexico, the Taxpayers again questioned

whether they should have paid New Mexico income taxes on their compensation received when

they were in Spain. Mrs. Avilucea went to the Department’s Las Cruces office and explained the

situation to an unidentified employee. At that time, Mrs. Avilucea was informed that she and her
husband were not subject to New Mexico personal income tax on their compensation received

when they were working in Spain.

16. Subsequently, on April 16, 1998, the Taxpayers applied to the Department for a

refund in the amount of $5,519.95, representing the personal income taxes they had paid to the

Department for tax years 1990-1993.

17. On December 3, 1998, the Department denied the Taxpayers’ claim for refund of

personal income taxes for tax years 1990-1993.

18. On February 17, 1999, the Taxpayer’s filed a protest to the Department’s denial of

their claim for refund.

DISCUSSION

The issue to be determined is whether the Department properly denied the Taxpayers’

claim for refund. The Department denied the refund on the basis that the statute of limitations

for claiming the refund at issue had passed. The pertinent statutory provision is Section 7-1-26

(C)(1) NMSA 1978, which provides in pertinent part:

no credit of refund of any amount may be allowed of made to any
person unless as the result of a claim made by that person as
provided in this section:
(1) within three years of the end of the calendar year in
which:
(a) the payment was originally due or the
overpayment resulted from an assessment by the department
pursuant to Section 7-1-17 NMSA 1978, whichever is later;

Pursuant to § 7-2-12 NMSA 1978, personal income tax returns and payments are due on or

before the 15th day of the fourth month following the end of the taxable year. Because the

Taxpayers used a calendar year as their taxable year, their returns were due on April 15th of the

year following their taxable year. For the 1990 through 1993 tax years, those returns would have
been due on April 15, 1991, 1992, 1993 and 1994, respectively. Because the Taxpayer’s claim

for refund, filed on April 16, 1998, was filed more than three years after the end of the calendar

years of those due dates, their claim was filed beyond the limitation period for filing such claims.

It may be small consolation for the Taxpayers, but their extraordinary efforts to properly

pay their state income taxes did, in fact, protect them from facing a liability for additional tax,

penalty and interest on their income earned while in Spain. This is because New Mexico

imposes an income tax on the income of every resident individual. Section 7-2-3 NMSA 1978.

A resident is defined at § 7-2-2(S) of the Income Tax act as follows:

“resident” means in 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. (emphasis added).

This definition of resident links residency to where an individual is domiciled. A person’s

domicile depends upon where they intend to reside. Domicile within a state does not require

physical presence in the state at all times. Rather it requires physical presence in the state at

some time in the past together with a concurrent intention to make the state one’s home. Hagan

v. Hardwick, 95 NM 517, 624 P.2d 26 (1981). In accord with the common law definition of

domicile, Regulation 3 NMAC 3.1.9.2 defines 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.

In this case, the evidence supports a conclusion that the Taxpayers were residents of New

Mexico, even while overseas on a tour of duty with the Department of the Navy. That is because

at all times they retained their home in New Mexico, kept their vehicles registered here, and
otherwise indicated their intention to return to their home in New Mexico after their tour of duty.

As residents of New Mexico, their income was subject to New Mexico income tax even though it

was earned while they were in Spain.

Unfortunately, in all probability, the Taxpayers overpaid the amount of income tax for

which they would have been liable. The Taxpayers are upset because when they sent in their

estimated payments they asked the Department to inform them if they had overpaid or underpaid

their taxes. Because of the passage of time, the Department no longer has a record of the

documents the Taxpayer’s submitted with their estimated payments. It appears, however, that the

Department would not have had the information it would have needed to actually determine

whether there were overpayments of tax because it does not appear that actual returns were

submitted by the Taxpayers, but only estimated payments. Without more information as to the

amount of the Taxpayers’ itemized deductions and other pertinent information, the Department

could not have known how to respond to the Taxpayer’s request. Had the Taxpayer’s brought in

this information shortly after their return from Spain, a claim for refund could have been

submitted within the applicable statute of limitations.

While I, as a decision-maker, am unable to provide the relief requested by the Taxpayers,

I would be remiss if I did not commend them for their extraordinary, honest and sincere efforts to

comply with the tax laws of the State of New Mexico.

CONCLUSIONS OF LAW

1. Taxpayers filed a timely protest to the Department’s denial of their claim for

refund pursuant to Section 7-1-26 NMSA 1978, and jurisdiction lies over the parties and the

subject matter of this protest.

2. The Taxpayers claim for refund of personal income taxes for tax years 1990-1993

was untimely and barred by the provisions of Section 7-1-26(C)(1)(a) NMSA 1978.

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

DONE, this 21st day of October, 1999.