Can someone avoid New Mexico income tax by arguing that a private citizen isn't an 'individual,' or that the state can't estimate their income when the IRS hasn't assessed them?

Plain-English summary

John Gilliam ran a printing business (USA Printing) in Albuquerque. He and his wife didn't file New Mexico income tax returns for 1994 and 1995, so the Department issued estimated assessments — about $7,872 for 1994 and $7,234 for 1995 — by taking the couple's 1993 tax and grossing it up 50%, then adding penalty and interest. The Gilliams protested, but rather than dispute the numbers, they raised "tax-protester" legal theories.

The Hearing Officer denied the protest on every point.

• "A private citizen isn't an 'individual' subject to the tax." Section 7-2-3 imposes the income tax on every "resident individual," and Section 7-2-2 defines "individual" to include a "natural person." As the decision put it, natural persons "are not created by laws. They are born of their mothers." Being a private citizen doesn't take you outside the definition — Mr. Gilliam is a natural person and therefore a taxable individual.
• "New Mexico can't estimate my income because the IRS never assessed me." Rejected. New Mexico's tax starts from federal adjusted gross income, but the state has both the authority and the obligation to determine your income and tax independently of any IRS action — squarely decided against this position by the New Mexico Supreme Court in Holt v. New Mexico Taxation & Revenue Department (2002-NMSC-034).
• The amount. The Gilliams were given the chance to produce bank statements and check registers to challenge the estimate but offered no records at all. Under Section 7-1-17(C) an assessment is presumed correct, so with nothing to rebut it, the estimated tax, penalty, and interest stood.

What this means for you

"Tax-protester" arguments don't work

Theories that a natural person or "private citizen" isn't a taxable "individual," or that state tax depends on a prior IRS assessment, are consistently rejected in New Mexico. They won't defeat an assessment and they waste the one real opportunity you have — challenging the actual numbers.

If you don't file, the state will estimate — and the estimate is presumed correct

When you don't file, the Department can build an assessment from whatever it has (here, a 50% gross-up of an earlier year). That estimate is presumed correct, and the burden is on you to disprove it with records. If you don't produce your books, you'll be stuck with the estimate, plus penalty and interest.

The way to fight an estimated assessment is with records, not theories

The Gilliams could have shown their business and personal bank statements to argue the estimate was too high. They didn't, so they lost on the amount by default. If you think an estimated assessment overstates your income, bring the documentation.

Common questions

Q: Can I argue I'm not an 'individual' or 'person' subject to New Mexico income tax?
A: No. The statute taxes every resident "individual," and "individual" expressly includes a natural person. Being a private citizen or independent contractor doesn't exempt you.

Q: The IRS never assessed me — can New Mexico still tax me for those years?
A: Yes. New Mexico can independently determine your federal adjusted gross income and your state tax regardless of whether the IRS assessed you, as the Supreme Court held in Holt.

Q: How is an estimated assessment for a non-filer calculated, and how do I challenge it?
A: The Department estimates from available data — here, a prior year's tax grossed up. It's presumed correct, so you challenge it by producing records (bank statements, registers) showing your actual income was lower. Legal theories alone won't reduce it.

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

Citations and references

Statutes:

• Section 7-2-3 NMSA 1978 — imposition of personal income tax on every resident individual
• Section 7-2-2 NMSA 1978 — definitions of "individual" (includes a natural person) and "person"
• Section 7-1-17(C) NMSA 1978 — assessment presumed correct; Section 7-1-3(U) — tax includes penalty and interest
• Section 7-1-24 NMSA 1978 — protest

Cases cited:

• James A. Holt and Terri L. Holt v. New Mexico Taxation & Revenue Dep't, 2002-NMSC-034 (state may determine income independently of the IRS)
• Archuleta v. O'Cheskey, 84 N.M. 428 (presumption of correctness; taxpayer's burden)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: John F. Gilliam Jr. and Martha L. Gilliam
• Decision PDF: D&O 02-33

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
JOHN F. GILLIAM JR., AND MARTHA L. GILLIAM NO. 02-33
PROTEST TO ASSESSMENT NOS. 718277 AND 718278

DECISION AND ORDER

This matter came on for formal hearing on May 20, 1998 before Gerald B. Richardson,

Hearing Officer. John F. Gilliam Jr., and Martha L. Gilliam, hereinafter, “Taxpayers”, were

represented at the hearing by Mr. John F. Gilliam Jr. The Taxation and Revenue Department,

hereinafter, “Department”, was represented by its Chief Counsel, Frank D. Katz, Special

Assistant Attorney General. The instant matter involves the Taxpayers’ protest to assessments of

personal income tax. The hearing on this matter was consolidated for hearing at the same time as

the hearing of two other protests by the Taxpayers, those being a protest to a gross receipts tax

assessment and a protest to various Department levies. The hearing record was left open for 45

days for the Taxpayers to present additional information and arguments to be considered in

determining their protests. Based upon information provided by the Taxpayers subsequent to the

hearing, the gross receipts tax assessment was abated by the Department and that protest is now

moot. The Taxpayers’ protest to the Department’s levies was resolved by Decision and Order

No. 98-35. On June 14, 1998, Mr. Gilliam wrote the Hearing Officer, requesting transcripts of

the hearing conducted on May 20th. On June 16, 1998, the Hearing Officer responded to Mr.

Gilliam, informing him that there are no written transcripts of the hearing, but that the

Department does make audio tapes of the hearing, which constitute the official record of the

hearing. The Hearing Officer sent copies of the original tapes in response to Mr. Gilliam’s

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request. On July 22, 1998, the Taxpayers submitted additional legal authority in support of their

income tax assessment. The Hearing Officer was also informed by Mr. Katz that the Taxpayer

was making records available with respect to the gross receipts tax assessment and that the

Department would be sending one of its auditors to inspect those records and determine whether

the gross receipts tax assessment should be adjusted. Sometime thereafter, Mr. Katz, an exempt

state employee, was removed from his job by Governor Johnson. The matter was then assigned

to David Iglesias, the succeeding Chief Counsel. Mr. Iglesias took no action on the matter to the

knowledge of the Hearing Officer and after he resigned from the Chief Counsel position, the

Department’s legal file was missing and never found. Additionally, the original tapes of the

hearing, which had been given to the Legal Department’s support staff for copying and

transmittal to Mr. Gilliam, were missing and never found. The matter languished until the matter

was assigned to new counsel for the Department, Bruce J. Fort, Special Assistant Attorney

General. On October 3, 2001, he filed a Request for Hearing, seeking to have the matter re-

heard because of the missing tape record. The legal file was reconstructed from the Hearing

Officer’s pleadings file and Mr. Gilliam provided the copies of the tapes which had been

provided to him, allowing the hearing record to be reconstructed. Because the record was able to

be reconstructed, there was no need for a new evidentiary hearing. Based upon the evidence and

the arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On August 15, 1997, the Department mailed Assessment No. 718277 to the

Taxpayers assessing personal income tax, penalty and interest for the 1994 tax year in the total

amount of $7,872.

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2. On August 15, 1997, the Department mailed Assessment No. 718278 to the

Taxpayers assessing personal income tax, penalty and interest for the 1995 tax year in the total

amount of $7,233.72.

3. The Department’s assessments were provisional or estimated assessments because the

Taxpayers failed to file, report and pay personal income taxes to the Department for tax years

1994 and 1995.

4. The Department’s assessments were calculated by taking the amount of personal

income tax reported and paid to the Department by the Taxpayers for the 1993 tax year and

grossing it up by 50%, and then calculating the interest and penalty to be applied in accordance

with the statutes governing the imposition of penalty and interest.

5. On September 11, 1997, the Taxpayers filed a protest to Assessment Nos. 718277 and

718278.

6. Mr. Gilliam is the sole proprietor of a printing business located in Albuquerque, New

Mexico known as USA Printing.

7. Mr. Gilliam deposits the payments he receives from performing printing jobs for his

customers in the business account of USA Printing.

8. Mr. Gilliam wrote checks on the USA Printing business account to cover business

expenses. He also regularly wrote checks on the USA Printing business account made payable to

his personal checking account and deposited those checks in his personal account.

9. Mr. Gilliam regularly writes checks on his personal account to cover his personal

expenses such as his mortgage payment, grocery bills, etc.

10. Mr. Gilliam sometimes also draws cash out of the USA Printing business checking

account.

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11. The Internal Revenue Service (“IRS”) has not issued assessments for personal income

tax to the Taxpayers for tax years 1994 and 1995.

12. Although he was given the opportunity to do so, Mr. Gilliam presented no evidence to

dispute the factual correctness of the amount of the Department’s assessments, instead relying

upon his legal arguments as to the Department’s authority to assess the taxes.

DISCUSSION

At the close of the formal hearing, the Taxpayers were given the opportunity to submit

written argument within 45 days of the hearing in support of their protest. Taxpayers were also

given the opportunity to produce business and personal bank statements and check registers in

order to challenge the factual correctness of the amount of the Department’s assessments.

Taxpayers did submit written argument, in the form of a pleading captioned “Motion for

Abatement”, which was accepted as their legal argument. Taxpayers failed to present any

records to dispute the correctness of the amount of the Department’s assessments.

Section 7-1-17(C) NMSA 1978 provides that “Any assessment of taxes or demand for

payment made by the department is presumed to be correct.” “Tax” is defined at Section 7-1-

3(U) NMSA 1978 to include the amount of any interest and penalty relating to taxes assessed

pursuant to the provisions of the Tax Administration Act unless the context of the statutory

provision requires otherwise. Thus, the presumption of correctness also attaches to the interest

and penalty portions of assessments unless there is something in the context of the statute at issue

to indicate otherwise. Because of the presumption of correctness, the burden of proof is upon

any taxpayer protesting an assessment to present evidence contesting the factual correctness of

the assessment or legal arguments challenging the legal basis of the assessment which clearly

overcome the presumption of correctness. Archuleta v. O’Cheskey, 84 N.M. 428, 504 P.2d 638

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(Ct. App. 1972). Taxpayers having failed to present any evidence whatsoever to dispute the

amount of the Department’s assessment have failed to meet their burden of proof in this case and

the presumption of correctness that attaches to the Department’s assessments establishes the

factual correctness with respect to the amount of the assessments.

The Taxpayers, however, have presented legal arguments to contest the validity of the

Department’s personal income tax assessments. The first argument they raise is that they are not

“individuals” or “persons” upon whom the income tax is imposed. Section 7-2-3 NMSA 1978 is

the statute imposing New Mexico’s personal income tax. It provides:

A tax is imposed at the rates specified in the Income Tax Act upon
the net income of every resident individual and upon the net
income of every nonresident individual employed or engaged in
the transaction of business in, into or from this state, or deriving
any income from any property or employment within this state.
(emphasis added.)

Section 7-2-2 of the Income Tax Act defines “Individual” and “person” follows:

I. “individual” means a natural person, an estate, a trust or a
fiduciary acting for a natural person, trust or estate:
R. “person” means any individual, estate, trust, receiver,
cooperative association, club, corporation, company, firm,
partnership, limited liability company, joint venture,
syndicate of other association; “person” also means to the
extent permitted by law, any federal, state or other
governmental unit or subdivision or agency, department or
instrumentality thereof; (emphasis added.)

Mr. Gilliam claims that he operates his printing enterprise as a “private”, independent contractor

and citizen, not as an individual or person as defined above in the Income Tax Act. In support of

this argument he argues that the above definitions speak “in terms of artificial entities and forms

of doing business, which have been created by legislative acts or charters. The petitioner, as a

private citizen, is not such said legislative or congressional creation.” Taxpayer’s Motion for

Abatement, p. 15. Although some of the entities defined under the definitions of “individual”

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and “person” are artificial entities, such as trusts and corporations, which are creatures of the

law, the definition of an individual also includes the term “natural person” (emphasis added),

and “person” is defined to include an “individual”. Natural persons are not created by laws.

They are born of their mothers. Thus, regardless of the fact that Mr. Gilliam is a private citizen,

he is also a natural person, as that term is commonly understood, and as such, he is an

“individual” upon whom the legislature intended to impose an income tax pursuant to its

enactment of § 7-2-3 NMSA 1978.

The second argument raised by the Taxpayers is that because New Mexico’s personal

income tax “piggy-backs” on the federal income tax1, and because there has been no assessment

of income tax by the IRS against the Taxpayers for the 1994 and 1995 tax years, that the

Department cannot make its own independent determination of the Taxpayer’s federal adjusted

gross income for purposes of assessing New Mexico personal income tax. This argument is

rejected as well. This issue was recently addressed and determined adversely to the Taxpayers’

position by the New Mexico Supreme Court in James A. Holt and Terri L. Holt vs. New Mexico

Department of Taxation & Revenue, 2002-NMSC-034, NMSBB Vol. 41, No. 51, Dec. 19,

2002, at pp. 18-24. Because it is a recent decision which the Taxpayers may have difficulty

locating, a copy of the decision will be included with this decision when it is mailed to the

Taxpayers. The Department has the authority and indeed, the obligation, to correctly determine2

the Taxpayers’ income tax liability to the state.

1
The starting point for calculating an individual’s New Mexico personal income taxes begins with the individual’s
federal adjusted gross income. See, § 7-2-2(A) and (B) NMSA 1978.
2
In this case, the Department was forced to estimate the Taxpayers’ income tax obligation because the Taxpayers
chose not to make their financial records available to the Department from which it could make a more precise
determination.

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CONCLUSIONS OF LAW

1. The Taxpayers filed a timely, written protest, pursuant to § 7-1-24 NMSA 1978, to

Assessment Nos. 718277 and 718278 and jurisdiction lies over both the parties and the subject

matter of this protest.

2. The Taxpayers are “natural persons” and thus “individuals” who are subject to the

imposition of personal income tax pursuant to the Income Tax Act [Chapter 7, Article 2 NMSA

1978].

3. The Taxpayers failed to present evidence to overcome the presumption of correctness

which attaches, pursuant to § 7-1-17(C) NMSA 1978, to Assessment Nos. 718277 and 718278

and therefore those assessments are presumptively correct.

4. The Department may determine the Taxpayers’ federal adjusted gross income and

thus the Taxpayers’ New Mexico taxable income regardless of whether the Taxpayers have been

assessed federal income tax for the same tax periods by the IRS.

For the foregoing reasons, the Taxpayers’ protest IS HEREBY DENIED.

DONE, this 30th day of December, 2002.

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