When must a New Mexico corporation make quarterly estimated income tax payments, and does a regulation excuse it just because its tax was under $6,000 in the two prior years?

Plain-English summary

Malcolm Services, a family towing company, owed penalty and interest for skipping quarterly estimated corporate income tax payments — because it could reasonably expect its tax to top $5,000, and the regulation it relied on is not the two-year "safe harbor" it thought. Protest DENIED.

Section 7-2A-9.1 requires a corporation to pay estimated corporate income tax during the year "if its tax after applicable credits for such taxable year can reasonably be expected to be five thousand dollars ($5,000) or more." Malcolm Services made no estimated payments for the year ending July 31, 2000, believing it was excused because its tax liability in the two preceding years had been under $6,000. The Department disagreed and assessed $1,125.24 of penalty and interest for the missed quarterly payments; the company protested.

The regulation creates two separate presumptions, not a safe harbor

Regulation 3.4.9.10 NMAC has two subsections. Subsection A uses prior history: a corporation whose tax exceeded $6,000 in either of the two preceding years is presumed to reasonably expect $5,000 or more this year. Subsection B uses current results: a corporation whose tax exceeds $5,000 this year is presumed to have reasonably expected to owe estimated tax. Each presumption can be rebutted only by showing the liability arose from an extraordinary, unanticipated event (and simply being more profitable than planned does not count).

The company read Subsection A backwards — as though tax under $6,000 in the prior two years affirmatively excused estimated payments even when the corporation could anticipate exceeding $5,000 this year. The hearing officer rejected that reading. An agency's interpretation of its own regulation gets substantial weight (Klumker v. Allred), and the Department's reading was reasonable, while the company's added words that are not in Subsection A and ignored Subsection B entirely. More importantly, the company's reading conflicts with the statute itself, which turns on whether tax "can reasonably be expected to be" $5,000 or more — not on a prior-two-year floor. (The Department did stipulate that a one-time equipment-sale gain made the 1998 year an extraordinary event, so that year was excluded from the Subsection A analysis.)

The presumption of correctness was not overcome

Under Section 7-1-17(C), the assessment is presumed correct, and the taxpayer bears the burden to rebut it (Archuleta v. O'Cheskey). The only thing that could have abated the penalty and interest was evidence that the company could not reasonably have expected its year-2000 tax to exceed $5,000. Its actual liability for the year was $8,017, and it offered no such evidence — resting instead on its mistaken reading of the regulation. So the presumption stood, and the penalty and interest under Sections 7-1-67 and 7-1-69 were properly assessed.

Result: protest DENIED. The estimated-tax penalty and interest stood.

What this means for you

The estimated-payment trigger is a forward-looking test

A New Mexico corporation must make quarterly estimated payments whenever it can reasonably expect $5,000 or more of corporate income tax for the year (Section 7-2A-9.1). Base the decision on what you can anticipate this year, not solely on what you owed before.

The two-year, $6,000 rule is a presumption, not an exemption

Regulation 3.4.9.10's Subsection A only creates a presumption that you must pay when prior tax was high; it does not exempt you when prior tax was low. If you can foresee exceeding $5,000, you owe estimated payments regardless of prior years.

To escape the penalty, prove the liability was truly unforeseeable

You can rebut the presumptions only by showing the tax resulted from an extraordinary, unanticipated event. A business that is simply more profitable than expected does not qualify.

Reading a regulation your way is not evidence

The presumption that a Department assessment is correct (Section 7-1-17(C)) shifts the burden to you. Relying on a favorable statutory or regulatory interpretation, without facts showing you could not anticipate the liability, will not carry that burden.

Common questions

Q: What tax was involved?
A: New Mexico corporate income tax — specifically penalty and interest ($1,125.24) for failing to make quarterly estimated payments for the year ending July 31, 2000.

Q: When are estimated payments required?
A: When a corporation's tax after credits for the year can reasonably be expected to be $5,000 or more (Section 7-2A-9.1).

Q: Didn't the under-$6,000 prior years excuse the company?
A: No. Regulation 3.4.9.10's two-year rule is a presumption that you must pay, not an exemption when prior tax was low. The statute's reasonable-expectation test still applied.

Q: How could the company have won?
A: Only by proving it could not reasonably have expected its year-2000 tax to exceed $5,000. Its liability was $8,017, and it offered no evidence on that point.

Q: Did the equipment-sale gain matter?
A: Yes, for one year — the Department stipulated the one-time 1998 equipment-sale gain was an extraordinary event, so 1998 was excluded from the prior-year analysis. It did not change the outcome for the year 2000.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2A-9.1 — corporate estimated-tax payments required when tax can reasonably be expected to be $5,000 or more; failure triggers Sections 7-1-67 and 7-1-69
• NMSA 1978, § 7-1-67 — interest on underpayments
• NMSA 1978, § 7-1-69 — negligence penalty
• NMSA 1978, § 7-1-17(C) — a Department assessment is presumed correct; taxpayer bears the burden
• NMSA 1978, § 7-1-3 — "tax" includes related interest and civil penalty
• Regulation 3.4.9.10 NMAC — "Estimated tax; reasonable expectation" (two independent presumptions in subsections A and B)

Cases cited:

• Klumker v. Allred, 112 N.M. 42, 811 P.2d 75 (1991)
• State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct. App. 1989)
• Archuleta v. O'Cheskey, 84 N.M. 428, 504 P.2d 638 (Ct. App. 1972)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App. 1989)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Malcolm Services, Inc.
• Decision PDF: D&O 02-14

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
MALCOLM SERVICES, INC. No. 02-14
ID NO. 01-766199-00-4
ASSESSMENT NO. 2603212

DECISION AND ORDER

A formal hearing on the above-referenced protest was held May 16, 2002, before Margaret

B. Alcock, Hearing Officer. Malcolm Services, Inc. (“Taxpayer”) was represented by James W.

Ricci, CPA. The Taxation and Revenue Department ("Department") was represented by Javier Lopez,

Special Assistant Attorney General. The record was left open until May 31, 2002 to allow the parties to

submit additional written argument. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The Taxpayer is a family-owned corporation located in Albuquerque, New Mexico.

2. Since the 1940s, the Taxpayer has been engaged in the business of towing and

retrieving vehicles of all types.

3. The Taxpayer files annual corporate income tax returns for the fiscal year August 1

through July 31.

4. For the year ending July 31, 1998, the Taxpayer had a New Mexico corporate income

tax liability of $6,489.

5. A substantial portion of the Taxpayer’s 1998 tax liability was attributable to gain

from the sale of equipment. This sale was a one-time event that occurred during the last ten days of

the tax year.

6. When the tax attributable to the sale of equipment is factored out, the Taxpayer’s tax

liability for the year ending July 31, 1998 was $3,945.

7. For the year ending July 31, 1999, the Taxpayer had a New Mexico corporate income

tax liability of $3,435.

8. For the year ending July 31, 2000, the Taxpayer had a New Mexico corporate income

tax liability of $8,017.

9. Section 7-2A-9.1 NMSA 1978 of the Corporate Income and Franchise Tax Act

requires every taxpayer to make estimated payments during its taxable year if its tax liability can

reasonably be expected to be $5,000 or more.

10. Based on its reading of Department regulations, the Taxpayer believed it was

excused from this requirement if its tax liability for the two preceding years was less than $5,000.

For this reason, the Taxpayer did not make any estimated payments during the tax year ending July

31, 2000.

11. The Department’s reading of the pertinent statutes and regulations differed from the

Taxpayer’s reading, and the Department concluded that the Taxpayer was required to make

estimated payments during the year ending July 31, 2000.

12. On November 25, 2000, the Department issued Assessment No. 2603212 to the

Taxpayer in the total amount of $1,125.24, representing penalty and interest due on the Taxpayer’s

failure to make quarterly estimated payments during the year ending July 31, 2000.

13. On November 28, 2000, the Taxpayer filed a written protest to the Department’s

assessment.

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DISCUSSION

The issue presented is whether the Taxpayer is liable for interest and penalty resulting from

its failure to make quarterly estimated payments of corporate income tax during the tax year ending

July 31, 2000. This issue is governed by Section 7-2A-9.1 NMSA 1978 which provides, in pertinent

part:

A. Every taxpayer shall pay estimated corporate income tax to the state of
New Mexico during its taxable year if its tax after applicable credits for such
taxable year can reasonably be expected to be five thousand dollars ($5,000)
or more....

C. Every taxpayer to which Subsection A of this section applies that fails to
pay the estimated tax when due...shall be subject to the interest and penalty
provisions of Sections 7-1-67 and 7-1-69 NMSA 1978 on the underpayment.

The Department maintains that the Taxpayer could reasonably have expected its tax liability to

exceed $5,000 for the year ending July 31, 2000 and was therefore required to make quarterly

estimated payments. The Taxpayer argues that Department Regulation 3.4.9.10 NMAC excuses a

corporation from this requirement if its tax liability for the two preceding years was less than $6,000.

Regulation 3.4.9.10 NMAC to Section 7-2A-9.1 NMSA 1978 reads as follows:

3.4.9.10 Estimated tax; reasonable expectation.

A. Any corporation filing separately or any group of corporations filing on a
combined or consolidated basis that has a liability of $6,000 or more under
the corporate income tax in either of the two immediately preceding taxable
years is presumed to reasonably expect to have a corporate income tax
liability of $5,000 or more for the taxable year. The taxpayer may rebut the
presumption by showing that liability in the two immediately preceding years
exceeded $6,000 because of extraordinary events.

B. Any corporation or group of corporations filing on a combined or
consolidated basis which has a corporate income tax liability exceeding
$5,000 for a taxable year is presumed to have reasonably expected to owe
estimated tax, unless the taxpayer demonstrates that the corporate income tax

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liability was the result of an extraordinary event or series of events which
could not have been anticipated in the ordinary course of business planning.
The fact that the taxpayer’s normal business was more profitable than
planned is not such an extraordinary event or series of events.

The Taxpayer reads Subsection A of the regulation to mean that a corporation with a tax liability of

less than $6,000 in the two immediately preceding years is not required to make estimated payments

for the current year.1 The Taxpayer asserts that this safe harbor provision applies even if the

corporation could, in fact, have anticipated that its tax liability for the current year would exceed

$5,000. The Department maintains that Subsections A and B create two separate, independent

presumptions. Subsection A relies on prior reporting history to create a presumption that a

corporation whose tax liability exceeded $6,000 in either of the preceding two years could

reasonably expect its liability for the current year to exceed $5,000. Subsection B relies on current

reporting to create a presumption that a corporation whose liability exceeds $5,000 could reasonably

expect to owe estimated tax for that year. In each case, the corporation can overcome the

presumption by demonstrating that the excess liability was the result of an extraordinary,

unanticipated event.

The interpretation of a regulation by the agency charged with administering it is entitled to

be accorded substantial weight. Klumker v. Allred, 112 N.M. 42, 47, 811 P.2d 75, 80 (1991); see

also, State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658, 662, 777 P.2d 386, 390 (Ct.

App. 1989). In this case, there is nothing unreasonable or illogical in the Department’s interpretation

of Regulation 3.4.9.10. In contrast, the Taxpayer’s interpretation conflicts with the

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Although the Taxpayer’s liability for the year ending July 31, 1998 exceeded $6,000, the Department
stipulated that the Taxpayer’s sale of equipment was an extraordinary event and that the tax attributable to gain
on the sale should be excluded in determining the Taxpayer’s tax liability for purposes of Subsection A of the
regulation.

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express terms of Section 7-2A-9.1 NMSA 1978, which requires a corporation to make estimated

payments “if its tax after applicable credits for such taxable year can reasonably be expected to be

five thousand dollars ($5,000) or more....” The Taxpayer’s position that Subsection A of Regulation

3.4.9.10 NMAC excuses a corporation from making estimated payments—even when the

corporation can anticipate that its tax liability for the current year will exceed $5,000—is directly

contrary to this statutory provision. The Taxpayer’s argument reads language into Subsection A that

is not there (i.e, that a tax liability of less than $6,000 in the prior two years creates a negative

presumption that the corporation could not reasonably anticipate a liability of $5,000 or more in the

current year) and completely ignores the existence of Subsection B of the regulation. The Taxpayer

is mistaken in concluding that the regulation creates alternative grounds to excuse a corporation from

payment of estimated tax.

Section 7-1-17(C) NMSA 1978 states that any assessment of taxes made by the Department

is presumed to be correct, and it is the taxpayer's burden to overcome this presumption. Archuleta v.

O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972). Section 7-1-3 NMSA 1978

defines tax to include not only the amount of tax principal imposed but also, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto." See also, El Centro

Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795, 779 P.2d 982 (Ct. App.

1989). In this case, the only basis for abating the Department’s assessment of interest and penalty

would be evidence that the Taxpayer could not have reasonably expected its tax liability for the year

ending July 31, 2000 to exceed $5,000. The Taxpayer declined to submit any evidence on this issue,

choosing instead to rely on its erroneous interpretation of Regulation 3.4.9.10 NMAC. Accordingly

the statutory presumption of correctness that attaches to the Department’s assessment has not been

overcome.

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CONCLUSIONS OF LAW

1. The Taxpayer filed a timely, written protest to Assessment No. 2603212, and

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

2. The Taxpayer was required to make quarterly estimated payments of corporate income

tax during its tax year ending July 31, 2000.

3. The Taxpayer is liable for interest and penalty resulting from its failure to make

quarterly estimated payments of corporate income tax during its tax year ending July 31, 2000.

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

DATED June 3, 2002.

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