Were a wage-tax assessment and lien invalid because the IRS report was exchanged under a standing agreement, unsigned, and issued by allegedly unbonded employees?

Plain-English summary

Jo Ann Stockton owed New Mexico income tax on $17,153 of wages reported through an IRS examination, and the Department's tax lien against her was valid. Her challenges to the standing information-sharing agreement, unsigned IRS report, taxability of wages, pre-hearing lien, and employee bonding requirements failed. The Department did agree to release the lien against her husband because he had never been assessed.

The IRS Revenue Agent Report showed that Jo Ann Stockton had reported zero 1999 taxable income but received $17,153 of wages from NCES of New Mexico. After the standard deduction and exemption, corrected federal taxable income was $10,803.

She did not file a New Mexico return reporting the wages. The Department assessed $330 of tax, $33 of penalty, and $202.95 of interest. It later filed a tax lien against Jo Ann and Brooky Stockton.

The standing IRS agreement authorized disclosure

Section 6103(d) allowed state tax agencies to receive federal return information upon a written request meeting specified conditions. New Mexico's 1988 coordination agreement, signed by the agency heads, expressly served as that authorization and contemplated continuous exchange under implementing agreements.

Federal decisions treated such agreements as standing requests for categories of tax information. A separate written request for each taxpayer was unnecessary.

Even if disclosure procedures had been violated, Section 7431 supplied a federal cause of action. Excluding the report or abating valid state tax was not an available remedy.

The unsigned IRS report remained usable

The report displayed a typewritten agent name and date but no original signature under penalty of perjury. The Stocktons invoked Section 6065.

The decision held that Section 6065's verification rule applied to returns and other documents taxpayers were required to make, not notices issued by IRS agents. The Department could rely on the Revenue Agent Report.

Private-employer wages were taxable income

Stockton did not deny working for NCES or receiving the money. She argued that compensation from an "occupation of common right" was not taxable and that income tax applied only to foreign income, corporations, or government employees.

The cited federal and New Mexico law expressly included compensation, wages, and salaries in taxable income. Section 861 source rules did not exempt domestic private-employer wages.

The lien was valid only against the assessed taxpayer

Sections 7-1-37 and 7-1-38 created a statutory lien upon assessment and demand and specified the notice contents. The lien against Jo Ann met those requirements.

The Department did not need to provide a hearing before filing it; the cited due-process decisions allowed tax collection protections before final resolution, with later review.

Brooky Stockton, however, had never been assessed. The lien against him did not satisfy the statute, and the Department agreed to release it, making his protest moot.

Department employees did not need individual bonds or oaths

The workers who assessed, collected, and heard the protest were employees hired under the Personnel Act, not elected or appointed public officers exercising independent sovereign power.

The Surety Bond Act provided the exclusive state coverage mechanism. It did not require each Department employee to buy and file an individual bond with the Secretary of State.

Result: the Stocktons' protests were DENIED; the assessment and Jo Ann's lien stood, while Brooky's lien was to be released.

What this means for you

Taxpayers whose income is reported through an IRS adjustment

Standing federal-state agreements can authorize routine exchange of examination reports. Challenge the income with records rather than assuming the exchange itself invalidates tax.

Taxpayers reviewing an unsigned IRS notice

The perjury-verification rule for taxpayer-filed documents did not apply to an IRS-issued examination report in this decision.

Married couples facing a tax lien

Confirm which spouse was actually assessed. A lien could not remain against Brooky when the Department had issued no assessment to him.

Taxpayers raising employee-authority objections

General public-officer oath and bond provisions did not apply to ordinary Department employees covered by the state personnel and surety systems.

Common questions

Q: How much wage income was at issue?
A: $17,153 from NCES of New Mexico.

Q: Did the IRS need a taxpayer-specific written request from New Mexico?
A: No. The standing coordination agreement satisfied the written-request requirement for covered information.

Q: Was the unsigned Revenue Agent Report invalid?
A: No. Section 6065 did not apply to notices issued by IRS agents.

Q: Why was Jo Ann's lien valid before the hearing?
A: It arose under the tax-lien statutes after assessment and demand, and due process did not require pre-lien adjudication.

Q: Why was Brooky's lien released?
A: The Department had never issued an assessment against him.

Citations and references

Statutes:

• NMSA 1978, § 7-1-17(C) — presumption that assessments and demands are correct
• NMSA 1978, §§ 7-1-37 and 7-1-38 — tax lien and notice requirements
• NMSA 1978, § 7-2-2(C) — compensation includes wages and salaries
• NMSA 1978, § 7-2-3 — income tax on resident individuals
• NMSA 1978, § 9-11-6(B)(11)-(12) — Department bond provisions
• NMSA 1978, §§ 10-2-13 to 10-2-16 — Surety Bond Act
• 26 U.S.C. § 6103(d) — federal-state disclosure of tax information
• 26 U.S.C. § 6065 — verification of taxpayer-filed documents
• 26 U.S.C. § 7431 — federal cause of action for improper disclosure

Key cases cited:

• Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-034, 133 N.M. 11, 59 P.3d 491
• Smith v. United States, 964 F.2d 630 (7th Cir. 1992)
• Taylor v. United States, 106 F.3d 833 (8th Cir. 1997)
• Morelli v. Alexander, 920 F. Supp. 556 (S.D.N.Y. 1996)
• Lonsdale v. United States, 919 F.2d 1440 (10th Cir. 1990)
• McKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990)
• State ex rel. Gibson v. Fernandez, 40 N.M. 288, 58 P.2d 1197 (1936)
• Lacy v. Silva, 84 N.M. 43, 499 P.2d 361 (Ct. App. 1972)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Jo Ann Stockton
• Decision PDF: D&O 05-18

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
JO ANN STOCKTON TO ASSESSMENT
OF PERSONAL INCOME TAX ISSUED No. 05-18
UNDER LETTER ID NO. L0391334912
JO ANN AND BROOKY STOCKTON TO
NOTICE OF CLAIM OF LIEN DATED
JANUARY 20, 2005

DECISION AND ORDER

An administrative hearing on the above-referenced protest was held on July 29, 2005

before Margaret B. Alcock, Hearing Officer. The Taxation and Revenue Department ("the

Department") was represented by Elizabeth K. Korsmo, Special Assistant Attorney General. Jo

Ann and Brooky Stockton (“the Stocktons”) represented themselves. Based on the evidence

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

FINDINGS OF FACT

1. In 1988, the Department entered into an Agreement on Coordination of Tax

Administration with the Internal Revenue Service.

2. Section 3.2 of the agreement, which was signed by the Department’s cabinet

secretary and the IRS commissioner, states: “This agreement constitutes the requisite

authorization pursuant to section 6103(d)(1) of the Code for IRS to disclose to, and permit

inspection by, an Agency Representative of Federal returns and Federal return

information….”

3. Section 1.2 of the agreement provides for the parties to enter into an

implementing agreement “prescribing the nature, quantity and mechanics for the continuous

exchange of tax information, including criteria and tolerance for selection of tax returns and

return information….”

4. In 2003, the IRS provided the Department with tax information concerning Jo

Ann Stockton via federal form 4549, titled “Income Tax Examination Changes,” which is

generally referred to as a Revenue Agent Report (“RAR”).

5. The RAR did not have an original signature, but showed the typewritten name

“A. Likens” and the typewritten date “07/17/2002.”

6. The RAR showed that Jo Ann Stockton reported zero taxable income for the

1999 tax year and that the IRS adjusted her income by an additional $17,153.00, representing

wages she received from NCES of New Mexico, Inc.

7. The RAR gave Ms. Stockton credit for the standard federal deduction and

exemption, and determined that her corrected taxable income for 1999 was $10,803.00,

resulting in federal income tax due of $1,624.00, less prepayment credits of $576.00 for tax

withheld by NCES.

8. The RAR included the following statement: “The Internal Revenue Service

has agreements with State tax agencies under which information about Federal tax, including

increases or decreases, is exchanged with the States. If this change affects the amount of

your State income tax, you should file the State form.”

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9. Ms. Stockton did not file a 1999 New Mexico personal income tax return

reporting the taxable income shown on the RAR.

10. On May 26, 2004, the Department issued an assessment under Letter ID No.

L0391334912 assessing Ms. Stockton for $330.00 of 1999 personal income tax, plus $33.00

of penalty and $202.95 of interest accrued to the date of assessment.

11. On June 16, 2004, Ms. Stockton filed a written protest to the assessment.

12. On January 20, 2005, the Department issued Notice of Claim of Tax Lien No.

161920 against Jo Ann Stockton and Brooky R. Stockton.

13. The Department mailed the Notice of Claim of Tax Lien to the Stocktons on

February 10, 2005, but sent it to an incorrect address. The United States Postal Service

redirected the envelope to the Stocktons’ correct address and the notice of lien was received

by the Stocktons on March 9, 2005.

14. On March 16, 2005, the Stocktons filed a written protest to the Department’s

Claim of Tax Lien No. 161920.

15. An administrative hearing on the Stocktons’ consolidated protests was held on

July 29, 2005.

16. At the close of the hearing, the Stocktons asked for additional time to respond

to the Department’s legal arguments, and the Hearing Officer gave the Stocktons until

September 1, 2005 to submit supplemental arguments.

17. On August 30, 2005, the Hearing Officer received a document from the

Stocktons entitled “Factual Deficiencies Undermining the Assessment of Tax Against Jo Ann

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and Brooky Stockton for the Tax Period Ending 1999,” which the Hearing Officer accepted

as the Stocktons’ supplemental brief.

ISSUES TO BE DECIDED

There are five issues to be addressed in this protest. See, Statement of Claim at pages 3-

4 of the Stocktons’ Certified Petition to Abate Claim of Lien and Constructive Notice

(“Certified Petition”), and the Hearing Officer’s Order Granting Continuance:

1. Whether the information-sharing agreement entered into between the New
   Mexico Taxation and Revenue Department and the Internal Revenue Service meets the
   requirements of 26 U.S.C. § 6103(d) and authorizes the Department to obtain tax information
   concerning individual residents of New Mexico without having to submit a separate, written
   request for each resident.

2. Whether the Taxation and Revenue Department was entitled to rely on the
   information contained in the Internal Revenue Service’s July 17, 2002 Revenue Agent Report
   (“RAR”) on Jo Ann Stockton, or whether the RAR is invalid under the provisions of 26 U.S.C.
   § 6065, which states that “any return, declaration, statement, or other document required to be
   made under any provision of the internal revenue laws or regulations shall contain or be
   verified by a written declaration that it is made under the penalties of perjury.”

3. Whether the 1999 income that Jo Ann Stockton identifies as being received
   “from working in an occupation of common right” and the July 17, 2002 RAR identifies as
   “wages—NCES of New Mexico Inc.” is subject to tax under the provisions of the Internal
   Revenue Code (26 U.S.C. § 1 et seq.) and is, therefore, also subject to tax under New Mexico’s
   Income Tax Act (NMSA 1978, § 7-2-1 et seq.).

4. Whether the January 2005 Notice of Claim of Lien the Taxation and Revenue
   Department filed against Brooky and Jo Ann Stockton is a valid lien under the provisions of the
   Tax Administration Act (NMSA 1978, § 7-1-1 et seq.) or other New Mexico law.

5. Whether employees of the Taxation and Revenue Department are “public
   officers” required to file a surety bond with the New Mexico Secretary of State before they may
   legally carry out their duties as state employees.

4
BURDEN OF PROOF

NMSA 1978, § 7-1-17(C) states that any assessment of taxes or demand for payment

made by the Department is presumed to be correct, and the burden is on the Stocktons to

overcome this presumption. See, Holt v. New Mexico Department of Taxation & Revenue,

2002 NMSC 34, ¶ 4, 133 N.M. 11, 59 P.3d 491. In addition, the interpretation of a statute by

the agency charged with its administration is to be given substantial weight. Regents of

University of New Mexico v. Hughes, 114 N.M. 304, 312, 838 P.2d 458 (1992). See also,

NMSA 1978, § 9-11-6.2(G). As the party challenging the Department’s Notice of Claim of

Tax Lien, it is the Stocktons’ burden to show that the Department’s interpretation of the Tax

Administration Act’s statutory lien provisions is incorrect.

DISCUSSION

Issue 1: IRS Disclosure of Information to State Tax Authorities. 26 U.S.C. §

6103(d)(1) authorizes the IRS to disclose returns and return information to any state agency

charged with responsibility for the administration of state tax laws,

only upon written request by the head of such agency, body, or commission,
and only to the representatives of such agency, body, or commission
designated in such written request as the individuals who are to inspect or to
receive the returns or return information on behalf of such agency, body, or
commission. Such representatives shall not include any individual who is the
chief executive officer of such State or who is neither an employee or legal
representative of such agency, body, or commission nor a person described in
subsection (n) [relating to persons performing certain services, such as
processing, storage, transmission, programming, etc., for purposes of tax
administration]….

The IRS’s disclosure of information concerning Ms. Stockton was made under the terms of a

1988 agreement between the IRS and the Department. A copy of the “Agreement on

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Coordination of Tax Administration Between Internal Revenue Service and the State of New

Mexico” was provided to the Stocktons and introduced at the administrative hearing. The

Stocktons argue that the agreement’s general authorization for the exchange of information

does not meet the requirements of 26 U.S.C. § 6103 and that the Department was required to

submit a specific request for Ms. Stockton’s tax information before the RAR could be released.

This same argument has previously been considered—and rejected—by the federal courts.

In Smith v. United States, 964 F.2d 630, 633-634 (7th Cir. 1992), cert. denied, 506

U.S. 1067 (1993), the Seventh Circuit Court of Appeals addressed the issue as follows:

In order for the Agreement on Coordination to fulfill the written request
requirement of section 6103(d), it must (1) "request" tax information, (2) be
signed by the head of the state tax agency and (3) designate the individuals
"who are to inspect or to receive the returns or return information" on behalf of
the agency. 26 U.S.C. § 6103(d). The Agreement on Coordination meets these
criteria. Section 3.2 of the Agreement provides:

This agreement constitutes the requisite authorization pursuant
to section 6103(d) of the Code for I.R.S. to disclose to, and
permit inspection by, an Agency representative of Federal return
information relating to taxes imposed by chapters 1 [Income
Taxes] . . . of the Code.

Section 5.1 states that the IDR and the IRS will furnish each other with
information on audit adjustment, and section 5.2 provides that the IDR and the
IRS "will exchange lists of taxpayers and other information relevant to the
identification of persons who have failed to file tax returns." The Agreement
on Coordination thus constitutes a blanket request for certain categories of
information, including information relating to tax delinquencies and failures to
file returns. These categories clearly include the information disclosed in this
case.

See also, Taylor v. United States, 106 F.3d 833 (8th Cir. 1997); Long v. United States, 972

F.2d 1174 (10th Cir. 1992); Stone v. Commissioner, T.C. Memo 1998-314 (U.S. Tax Court

6
Memos 1998); McQueen v. United States, 5 F.Supp.2d 473 (D. Tex. 1998). The text of

Section 3.2 of New Mexico’s agreement with the IRS is virtually identical to the text quoted

in Smith. Section 1.2 of the New Mexico agreement provides for the parties to enter into an

implementing agreement “prescribing the nature, quantity and mechanics for the continuous

exchange of tax information, including criteria and tolerance for selection of tax returns and

return information….” This language clearly authorizes the “continuous” exchange of broad

categories of tax information and does not contemplate the submission of a separate written

request for the return information of each individual taxpayer.

Even if the IRS did not follow proper procedures in releasing information to the

Department, the Stocktons’ remedy is found in 26 U.S.C. § 7431, which creates a cause of

action against the United States for the improper disclosure of an individual's return

information. Despite the Stocktons’ reference to the “fruit of the poisonous tree” (Certified

Petition at page 7), there is no legal authority to support their argument that improper

disclosure warrants abatement of an otherwise valid assessment. In Nowicki v.

Commissioner, 262 F.3d 1162, 1163 (11th Cir. 2001), the Eleventh Circuit Court of Appeals

held that exclusion of evidence is not an appropriate remedy for a violation of § 6103:

[I]mposition of the exclusionary rule is not warranted for a disclosure of return
information which violates § 6103. Congress has specifically provided civil
(I.R.C. § 7431) as well as criminal penalties (I.R.C. § 7213) for violations of §
6103. There is no statutory provision requiring exclusion of evidence obtained
in violation of § 6103 and we will not invent one.

See also, United States v. Orlando, 281 F.3d 586, 595-596 (6th Cir. 2002).

7
Finally, the Stocktons challenge the Department’s interpretation of § 6103(d) as a

violation of their privacy rights. This argument, too, has been rejected by the federal courts.

As stated in Taylor v. United States, 106 F.3d 833, 836 (8th Cir. 1997):

Taylor argues that, if we allow the agreements at issue to operate as standing
requests for disclosure of taxpayer information, we will "totally eviscerate[]
Section 6103 as a statutory implementation of a right of privacy." Appellant's
Brief at 12. We disagree. The confidentiality of taxpayer information is by no
means absolute. The bulk of § 6103 constitutes exceptions to the general rule
of non-disclosure. See Church of Scientology v. IRS, 484 U.S. 9, 15, 98 L. Ed.
2d 228, 108 S. Ct. 271 (1987) ("Subsections (c) through (o) of § 6103 set forth
various exceptions to the general rule that returns and return information are
confidential and not to be disclosed. These subsections provide that in some
circumstances, and with special safeguards, returns and return information can
be made available to...state tax officials...."). Notwithstanding the need to
prevent abusive disclosure of federal taxpayer information by the IRS and
others, Congress clearly recognized the need for disclosure of such information
in certain carefully delineated circumstances. Disclosure of individual
taxpayer information by the IRS to a state taxing authority via a standing
written agreement that is carefully crafted to satisfy concerns for
confidentiality implements rather than "eviscerates" the will of Congress.

Based on federal courts’ interpretation of § 6103(d), the information contained in the RAR on

Ms. Stockton was properly disclosed to the Department.

Issue 2: Validity of Unsigned RAR. The Stocktons argue that the RAR the

Department received from the IRS was invalid because it was not signed under penalty of

perjury as required by 26 U.S.C. § 6065, which states as follows:

§ 6065. Verification of returns.
Except as otherwise provided by the Secretary, any return, declaration,
statement, or other document required to be made under any provision of the
internal revenue laws or regulations shall contain or be verified by a written
declaration that it is made under the penalties of perjury.

8
In Morelli v. Alexander, 920 F. Supp. 556, 558 (S.D.N.Y. 1996), the court disposed of this

argument as follows:

Morelli argues that the Agents violated their duty under 26 U.S.C. § 6065 by
failing to sign the notices that they sent to Morelli…. Morelli has incorrectly
interpreted this provision. Section 6065 was enacted to permit the taxpayer
to submit a verified return rather than a notarized return, see, e.g., Cohen v.
United States, 201 F.2d 386, 393 (9th Cir.) (construing § 6065's predecessor
provision), cert. denied, 345 U.S. 951, 97 L. Ed. 1374, 73 S. Ct. 864 (1953),
and does not apply to notices issued by IRS agents.

See also, Nordbrock v. United States, 173 F.Supp.2d 959, 972-973 (D. Ariz. 2001) (§ 6065

does not require that a lien or other notice issued by the IRS be verified by a written

declaration that it is made under penalty of perjury); Thompson v. IRS, 23 F.Supp.2d 923,

925 (D. Ind. 1998) (the verification provision of § 6065 does not apply to notices issued by

IRS agents); Cermak v. United States, 1997 U.S. App. Lexis 13706 (7th Cir. 1997) (the

phrase "required to be made" limits the applicability of § 6065 to documents that must be

filed with the IRS, and not documents issued by the IRS); McCandless v. United States, 2002

U.S Dist. Lexis 21464 (N.D. Cal. 2002) (the verification requirement in 26 U.S.C. § 6065

applies to taxpayers, not the IRS); Kaetz v. IRS, 2002 U.S. Dist. Lexis 14471 (D. Pa. 2002) (§

6065 does not apply to notices issued by the IRS). There is no legal authority to support the

Stocktons’ position that the July 17, 2002 RAR was invalid because it was not signed under

penalty of perjury.

Issue 3: Taxation of Ms. Stockton’s Compensation from NCES of New Mexico,

Inc. The RAR provided to the Department shows that Ms. Stockton earned $17,153.00 in

wages from NCES of New Mexico, Inc. during 1999. Ms. Stockton has not denied that she

9
worked for NCES and received payment for her services. Instead, Ms. Stockton maintains

that she was “working in an occupation of common right” and that the compensation she

received is not taxable income under the Internal Revenue Code. She also argues that the

income tax applies only to foreign income or to the income of corporations and government

employees. These arguments have been soundly rejected by both state and federal courts. In

Holt v. New Mexico Department of Taxation & Revenue, 2002 NMSC 34 ¶ 14, 133 N.M. 11,

59 P.3d 491, the New Mexico Supreme Court noted that the United States Supreme Court,

“as well as every circuit of the United States Court of Appeals, has recognized that

employment wages are taxable income.” The Holt decision confirmed that compensation

received by a New Mexico resident working for a private employer comes within the

definition of income in the Internal Revenue Code and New Mexico’s tax statutes:

Through its plain language, Section 61(a) includes "compensation for
services" in its definition of gross income. Our conclusion that compensation
for services equals wages earned from employment is confirmed by state
statute. Section 7-2-2(C) states that "'compensation' means wages, salaries,
commissions and any other form of remuneration paid to employees for
personal services." The plain language of Section 7-2-2(C) and Section 7-2-
3 specifically indicates that employment wages and salaries are taxable
income….

2002 NMSC 34, ¶ 12. Although the court found the Holts’ arguments to be “manifestly

without merit,” it issued a published decision “because the appeal appears to present an issue

of first impression and arguments that are likely to arise again, causing unnecessary

expenditure of public resources.” Id. at ¶ 3. Unfortunately, the Stocktons’ research in

support of their protest failed to uncover the Holt decision—or the hundreds of other

10
decisions holding that compensation paid to United States citizens by private employers is

subject to tax.

In Christensen v. United States, 733 F.Supp. 844, 850 (D.N.J., 1990), aff’d w/o

opinion, 925 F.2d 416 (3d Cir. 1991) the federal court held that payment for working in an

“occupation of common right” is subject to federal income tax, as did the court in Lonsdale v.

United States, 919 F.2d 1440 (10th Cir. 1990). In Lonsdale, the Tenth Circuit Court of Appeals

summarily disposed of the taxpayers’ numerous arguments concerning their liability for federal

income tax, including several of the arguments raised by the Stocktons:

"[T]he 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; and (10) the Anti-Injunction Act is
invalid."

919 F.2d at 1448. The courts have also rejected the Stocktons’ argument that the federal

income tax (and, therefore, the New Mexico income tax) is limited to income from a source

listed in the regulations to 26 CFR § 861, titled “Source Rules and Other General Rules

Relating to Foreign Income.” In July of this year, the Third Circuit Court of Appeals upheld

an injunction against Thurston Bell, described by the court as a “professional tax protester,”

who maintained a web site to sell bogus tax strategies. The court noted that:

11
Substantively, Bell's main rationale for avoiding the income tax is known as
the "U.S. Sources argument" or the "Section 861 argument." [footnote
omitted]. This method has been universally discredited. See, e.g., Great-West
Life Assurance Co. v. United States, 230 Ct. Cl. 477, 678 F.2d 180, 183 (Ct.
Cl. 1982); Loofbourrow v. Comm'r, 208 F. Supp. 2d 698, 709-10 (S.D. Tex.
2002); Williams v. Comm'r, 114 T.C. 136, 138-39 (2000)….

United States v. Bell, 414 F.3d 474 (3d Cir. 2005). See also, Christopher v. C.I.R., T.C.

Memo 2002-18 (U.S. Tax Ct. 2002) (the source rules of sections 861-865 do not exclude

from U.S. taxation income earned by U.S. citizens from sources within the United States).

Based on settled law, there is no question that Jo Ann Stockton is liable for federal—and

New Mexico—income tax on the compensation she received from NCES of New Mexico, Inc.

during 1999.

Issue 4: Validity of Notice of Claim of Tax Lien. The Stocktons maintain that the

Department’s Notice of Claim of Tax Lien No. 161920 is invalid because it is “not in a form

cognizable in any court of competent jurisdiction in this Nation,” citing to NMSA 1978, § 48-

1A-5 (Certified Petition at page 5, #14). Section 48-1A-5 is part of the Lien Protection

Efficiency Act enacted by the Legislature in 1999 and states:

Nonconsensual common law liens against real property shall not be recognized
or be enforceable. Nonconsensual common law liens claimed against personal
property shall not be recognized or be enforceable if, at the time the lien is
claimed, the claimant fails to retain actual lawfully acquired possession or
exclusive control of the property.

The lien filed by the Department is not a common law lien. It is a statutory lien authorized by

NMSA 1978, §§ 7-1-37 and 7-1-38. Section 7-1-37 states that a lien arises at the time an

assessment of tax and demand for payment is made pursuant to NMSA 1978, § 7-1-17. Section

7-1-38 states that:

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A notice of the lien provided for in Section 7-1-37 NMSA 1978 may be
recorded in any county in the state in the tax lien index established by Sections
48-1-1 through 48-1-7 NMSA 1978 and a copy thereof shall be sent to the
taxpayer affected. Any county clerk to whom the notices are presented shall
record them as requested without charge. The notice of lien shall identify the
taxpayer whose liability for taxes is sought to be enforced and the date or
approximate date on which the tax became due and shall state that New Mexico
claims a lien for the entire amount of tax asserted to be due, including
applicable interest and penalties. Recording of the notice of lien shall be
effective as to all property and rights to property of the taxpayer.

The Department’s Tax Lien No. 161920 against Jo Ann Stockton meets the requirements of

§§ 7-1-37 and 7-1-38. The lien against Brooky Stockton does not meet statutory

requirements because the Department has never issued an assessment against Mr. Stockton.

The Department has acknowledged this error, however, and stated at the administrative

hearing that it was in the process of releasing the lien against Brooky Stockton.

The Stocktons’ argument that filing a lien before granting them a hearing violates

their due process rights is also without merit. In McKesson Corp. v. Division of Alcoholic

Beverages & Tobacco, 496 U.S. 18, 37 (1990), the United States Supreme Court confirmed

the long-standing rule that states may take collection action on asserted tax liabilities prior to

hearing:

[I]t is well established that a State need not provide predeprivation process for
the exaction of taxes. To protect government's exceedingly strong interest in
financial stability in this context, we have long held that a State may employ
various financial sanctions and summary remedies such as distress sales in
order to encourage taxpayers to make timely payments prior to resolution of
any dispute over the validity of the tax assessment.

See also, Bob Jones University v. Simon, 416 U.S. 725, 746 n. 20 (1974) (noting that for at

least 60 years, the Court has dismissed claims that post-tax assessment or post-collection

13
appeals violate due process). Pursuant to the authority granted to the Department in the Tax

Administration Act, the lien filed against Jo Ann Stockton is valid.

Requirements of NMSA 1978, §§ 10-2-1 through 10-2-12 Regarding Oath of Office

and Surety Bond. The Stocktons maintain that the Department had no authority to issue an

assessment or lien against them because none of the Department employees involved in this

matter, including the Hearing Officer, have taken an oath of office or filed a surety bond with

the New Mexico Secretary of State. In support of their argument, the Stocktons cite to Article

XXII, § 19 of the New Mexico Constitution, which states:

Within thirty days after the issuance by the President of the United States of
his proclamation announcing the result of said election so ascertained, all
officers elected at such election, except members of the Legislature, shall
take the oath of office and give bond as required by this Constitution or by
the laws of the territory of New Mexico in case of like officers in the
territory, county or district, and shall thereupon enter upon the duties of
their respective offices; but the Legislature may by law require such officers
to give other or additional bonds as a condition of their continuance in
office.

The Stocktons also rely on NMSA 1978, §§ 10-2-5 through 10-2-9, which read as follows:

10-2-5. The bonds given by all persons elected or appointed to office in this
state shall be recorded.

10-2-6. The bonds of all state and district officers shall be recorded in a record
book to be provided for that purpose, and known as the record of official bonds,
in the office of the secretary of state.

10-2-7. The bonds of all state officials, and of the members of all state boards
and institutions, after having been recorded as required by law, shall be filed and
kept in the office of the secretary of state; and all state bonds now filed
elsewhere shall be transferred to the office of the secretary.

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10-2-8. The bonds of all county officers and constables shall be recorded in the
office of the county clerk in a book designated as the record of official bonds.
After having been recorded, the bonds shall be filed and kept in the office of the
county clerk.

10-2-9. Each and every person who may hereafter be elected or appointed to
office in this state, required by law to give bond, shall file the same for record
before entering upon the discharge of the duties of the office.

The Stocktons’ interpretation of the constitutional and statutory provisions quoted above

overlooks two important points. (1) the provisions of Article XXII, § 19 and §§ 10-2-5 through

10-2-9 apply to public officers “elected or appointed to office,” and do not apply to state

employees hired under the provisions of the Personnel Act (NMSA 1978, §§ 10-9-1, et seq.);

and (2) surety bond coverage for all state officers and employees is governed by the Surety

Bond Act (NMSA 1978, §§ 10-2-13 through 10-2-16), which supercedes the provisions of

NMSA 1978, §§ 10-2-5 through 10-2-9.

(1) Distinction Between a Public Officer and an Employee. The New Mexico courts

have made a clear distinction between public officers and state employees. In State ex rel.

Gibson v. Fernandez, 40 N.M. 288, 58 P.2d 1197 (1936), the New Mexico Supreme Court

held that a special tax attorney employed by the New Mexico state tax commission did not

qualify as a “public officer.” As the court explained:

All authorities agree that some portion of sovereignty must be vested in the
occupant of a position, to constitute it a public office. By the terms of the New
Mexico statute, "the power, jurisdiction and authority to collect all delinquent
taxes" is vested in the state tax commission, and for that purpose it was
"granted all powers and duties" theretofore granted to the district attorneys of
the state and to all special tax collectors or attorneys under existing laws…. It
is true the state tax commission is authorized to employ an officer to be known
as "Special Tax Attorney" with duties specified in the act, whose
compensation, within a limit, is to be fixed by the state tax commission, but the

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purpose of his employment is not to exercise any of the functions of
sovereignty, all of which is by unambiguous language delegated to the state tax
commission.

40 N.M. at 292-293, 58 P.2d at 1200. The same result was reached in Lacy v. Silva, 84 N.M.

43, 45, 499 P.2d 361, 363 (Ct. App.), cert. denied, 84 N.M. 37, 499 P.2d 355 (1972), where

the New Mexico Court of Appeals held that a district director employed by the state tax

commission was an employee and not a public officer:

[T]he district director is not free from control by the Commissioner, is not
autonomous and is not independent. Sovereign power has not been vested
with the district director either by the Legislature or by the Commissioner
pursuant to legislative authority. Absent a vesting of sovereign power in Silva
as district director, he was not an "officer" within the meaning of § 21-5-1(G),
supra. Silva was an employee. Section 72-13-15(D), N.M.S.A.1953
(Repl.Vol. 10, pt. 2, Supp.1971).

See also, State ex rel. Stratton v. Roswell Independent Schools, 111 N.M. 495, 505, 806 P.2d

1085, 1095 (Ct. App. 1991) (New Mexico has differentiated an "employee" from a "public

officer" based on the exercise of sovereign power).

In this case, the Department personnel involved in issuing the assessment and lien

against the Stocktons, as well as those involved in the conduct of the administrative hearing

on the Stocktons’ protest, are employees hired under New Mexico’s Personnel Act. They are

neither elected nor appointed to their positions and are not subject to the constitutional and

statutory requirements applicable to public officers.

(2) Surety Bond Act. NMSA 1978, § 9-11-6 prescribes the powers and duties of the

cabinet secretary of the Taxation and Revenue Department. Subsections (B)(11) and (12) of

§ 9-11-6 provide that the secretary shall:

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(11) give bond in the penal sum of twenty five thousand dollars
($25,000.) and require directors to each give bond in the penal sum of ten
thousand dollars ($10,000.00) conditioned upon the faithful performance of
duties, as provided in the Surety Bond Act. The department shall pay the
costs of these bonds; and

(12) require performance bonds of such department employees and
officers as the secretary deems necessary, as provided in the Surety Bond
Act. The department shall pay the cost of these bonds. (Emphasis added).

There is no evidence that the secretary has required performance bonds of the employees

involved in the assessment and lien issued against the Stocktons. Had she done so, however,

those bonds would be subject to the terms of the Surety Bond Act (NMSA 1978, §§ 10-2-13

through 10-2-16), which provides the exclusive form of coverage for all state officers and

employees, including the secretary. See, NMSA 1978, § 10-2-14(C). By its terms, the

Surety Bond Act supercedes the provisions of NMSA 1978, §§ 10-2-5 through 10-2-9

requiring state officers to record and file a bond with the secretary of state’s office. Section

10-2-15(A) of the Surety Bond Act provides as follows:

A. The [general services] department shall provide surety bond coverage for
all employees. Whenever an employee is required by another law to post bond
or surety as a prerequisite to entering employment or assuming office, the
requirement is met when coverage is provided for the office or position under
the provisions of the Surety Bond Act. Notwithstanding any other provisions
of law, no state agency or employee shall purchase any employee surety bond
other than pursuant to the provisions of the Surety Bond Act. (Emphasis
added).

This language evidences a clear legislative intent to limit surety bond coverage for state

officers and employees to coverage provided by the General Services Department of the State

of New Mexico. Nothing in the Surety Bond Act requires—or allows—the Department’s

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cabinet secretary or employees to obtain individual surety bonds or to file such bonds with

the secretary of state.

CONCLUSIONS OF LAW

A. The Taxpayers filed a timely, written protest to the assessment of personal

income tax issued to Jo Ann Stockton under Letter ID No. L0391334912 and to the Notice of

Claim of Tax Lien No. 161920, and jurisdiction lies over the parties and the subject matter of

this protest.

B. The 1988 Agreement on Coordination of Tax Administration entered into

between the Internal Revenue Service and the State of New Mexico meets the requirement for a

written request for taxpayer information in 26 U.S.C. § 6103(d), and the Revenue Agent Report

on Jo Ann Stockton was properly disclosed to the Department by the Internal Revenue Service.

C. The verification requirements in 26 U.S.C. § 6065 do not apply to notices issued

by the Internal Revenue Service, and the Department was entitled to rely on the Revenue Agent

Report on Jo Ann Stockton even though the report was not signed under penalty of perjury.

D. Jo Ann Stockton is liable for New Mexico income tax on the compensation she

received from NCES of New Mexico, Inc. during 1999.

E. The Department’s Notice of Claim of Tax Lien No. 161920 filed against Jo Ann

Stockton meets the statutory requirements of the Tax Administration Act and is a valid lien; the

Department has agreed to release the lien filed against Brooky Stockton, and Mr. Stockton’s

protest of the lien is now moot.

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F. Department employees are not public officers and are not required to take an

oath of office.

G. Pursuant to the terms of the Surety Bond Act (NMSA 1978, §§ 10-2-13 through

10-2-16), the Department’s cabinet secretary and employees are not required to obtain

individual surety bonds or file such bonds with the New Mexico Secretary of State.

For the foregoing reasons, the Stocktons’ protests ARE DENIED.

DATED September 2, 2005.

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