Was domestic nonemployee compensation exempt under the Section 861 source rules, or beyond New Mexico's authority because the IRS supplied the income data?

Plain-English summary

Donald Barnes owed New Mexico personal income tax on domestic nonemployee compensation and interest reported through an IRS examination. The Section 861 source rules did not exempt that income, and New Mexico did not need federal supervision to assess its own tax.

The IRS Revenue Agent Report adjusted Barnes's 1999 gross income from zero to $29,624: $29,593 of nonemployee compensation from Otero Enterprises and $31 of interest from Conseco Medical Insurance.

After deductions and exemptions, federal taxable income was $21,183. Barnes did not file a New Mexico return reporting it. The Department assessed $946 of state personal income tax, plus penalty and interest.

Barnes challenged the assessment on three grounds: his domestic income supposedly fell outside Section 861's taxable sources; only the U.S. Treasury Secretary or delegate could determine tax; and the IRS information exchange was allegedly based on errors or fraud. He did not respond to the Department's motion for summary judgment.

Section 861 did not limit ordinary gross income

Section 61(a) defined gross income broadly as all income from whatever source derived and expressly included compensation for services, business income, and interest.

Sections 861 through 865 supplied sourcing rules for provisions requiring income to be assigned to specific sources. They did not narrow Section 61 or exclude domestic compensation and interest earned by a U.S. taxpayer.

The decision noted that federal courts had repeatedly rejected the Section 861 or U.S.-sources argument.

New Mexico could assess its own tax

Barnes relied on old federal provisions that would have allowed a conforming state to ask the federal government to administer its income tax. No state adopted that program, and Congress repealed it before the 1999 tax year.

Nothing in those provisions displaced a state's sovereign authority to assess and collect its own income tax. The cited New Mexico Supreme Court authority expressly recognized New Mexico's power to act without federal supervision.

Unsupported claims did not rebut the IRS figures

Section 7-1-17(C) presumed the assessment correct, and Regulation 3.1.6.12(A) required countervailing evidence. Barnes had direct access to his own financial records but produced none disputing the $29,624 income total.

Suggesting that the IRS report might contain errors did not create a genuine issue of material fact or shift the evidentiary burden.

The disclosure agreements and remedy were valid

New Mexico's coordination and implementation agreements with the IRS authorized monthly exchange of examination reports under Section 6103(d).

Even if federal disclosure procedures had been violated, Section 7431 provided a federal cause of action. Suppression of the report or abatement of otherwise valid New Mexico tax was not an available remedy in this protest.

Result: the Department's motion for summary judgment was GRANTED, Barnes's protest was DENIED, and the scheduled hearing was vacated.

What this means for you

Independent contractors receiving Form 1099 income

Nonemployee compensation is included in gross income. Federal sourcing provisions did not exempt ordinary domestic service income in this decision.

Taxpayers disputing an IRS-derived state assessment

Use financial records to challenge specific amounts. General allegations of possible error did not overcome the assessment's presumption of correctness.

Taxpayers responding to summary judgment

Identify genuine material factual disputes and support them. Barnes filed no response, and the remaining questions were resolved as matters of law.

Taxpayers challenging federal-state data exchange

A disclosure claim is distinct from tax liability. The decision directed any improper-disclosure remedy to federal law rather than state-tax abatement.

Common questions

Q: What income did Barnes receive?
A: $29,593 of nonemployee compensation and $31 of interest.

Q: Why did the Section 861 argument fail?
A: Section 61 taxed income from whatever source derived, while Sections 861-865 did not create an exemption for domestic compensation.

Q: Could New Mexico assess tax without the IRS doing it?
A: Yes. The decision held that New Mexico had independent authority to assess and collect state income tax.

Q: Did Barnes produce records showing the IRS figures were wrong?
A: No.

Q: What did summary judgment do?
A: It resolved the case without a hearing because no genuine material fact remained and the Department was entitled to judgment as a matter of law.

Citations and references

Statutes and regulation:

• NMSA 1978, § 7-1-17(C) — presumption that an assessment is correct
• 26 U.S.C. § 61(a) — gross income from whatever source derived
• 26 U.S.C. § 6103(d) — federal-state disclosure of tax information
• 26 U.S.C. § 7431 — federal cause of action for improper disclosure
• Regulation 3.1.6.12(A) NMAC — evidence required to rebut an assessment

Key authorities cited:

• Rev. Rul. 2004-30
• Fikes v. Furst, 2003-NMSC-033, 134 N.M. 602, 81 P.3d 545
• Holt v. New Mexico Department of Taxation & Revenue, 2002-NMSC-034, 133 N.M. 11, 59 P.3d 491
• Grogan v. New Mexico Taxation & Revenue Department, 2003-NMCA-033
• Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955)
• Commissioner v. Schleier, 515 U.S. 323 (1995)
• Franchise Tax Board v. United States Postal Service, 467 U.S. 512 (1984)
• Smith v. United States, 964 F.2d 630 (7th Cir. 1992)
• Long v. United States, 972 F.2d 1174 (10th Cir. 1992)
• Nowicki v. Commissioner, 262 F.3d 1162 (11th Cir. 2001)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Donald Barnes
• Decision PDF: D&O 05-22

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
DONALD W. BARNES, TO ASSESSMENT No. 05-22
OF 1999 PERSONAL INCOME TAX ISSUED
UNDER LETTER ID L1666721792

ORDER GRANTING DEPARTMENT’S
MOTION FOR SUMMARY JUDGMENT
AND DENYING TAXPAYER’S PROTEST

This matter comes before the Hearing Officer on the Taxation and Revenue Department’s

September 22, 2005 Motion for Summary Judgment. Donald W. Barnes did not file a response.

Based on a review of the pleadings filed in this case, the Hearing Officer finds that there is no

genuine issue as to any material fact and that the Department is entitled to judgment as a matter

of law.

FINDINGS OF FACT

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

Administration with the Internal Revenue Service.

2. In 1989 and again in 1999, the Department entered into an Implementation

Agreement (Exhibit B to the Motion for Summary Judgment) to the 1988 coordination

agreement. The first paragraph of the Implementation Agreement states as follows:

Under the authority of Section 6103(d) of the Internal Revenue Code, as amended,
the New Mexico Taxation and Revenue Department, the Commissioner of
Internal Revenue Service adopted an Agreement on Coordination of Tax
Administration. This Agreement constitutes the requisite authorization for the
Internal Revenue Service and the Department to exchange tax returns and return
information and is currently in full force and effect.
The body of the agreement sets out the type of information that will be exchanged between the

IRS and Department on a monthly basis, including examination reports with respect to individual

income tax adjustments that result in additional federal tax above a specified amount.1

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

Donald Barnes via federal form 4549, titled “Income Tax Examination Changes,” which is

generally referred to as a Revenue Agent Report (“RAR”) (Exhibit A to Motion for Summary

Judgment).

4. Based on its examination, the IRS adjusted Mr. Barnes’ 1999 gross income from

zero to $29,624, representing $29,593 of non-employee compensation (“NEC”) from Otero

Enterprises Incorporated and $31 of interest from Conseco Medical Insurance Company.

5. After applicable deductions and exemptions, Mr. Barnes’ taxable income was

adjusted to $21,183, resulting in additional federal income tax of $3,176, plus $4,181 of self-

employment tax, for a total corrected federal tax liability of $7,357.

6. The RAR on Mr. Barnes 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.”

7. Mr. Barnes did not file a 1999 New Mexico personal income tax return reporting

the taxable income shown on the RAR.

1
The Department submitted a redacted copy of the Implementation Agreement with threshold amounts of additional
tax needed to trigger the exchange of information deleted. Presumably, this was done to avoid alerting taxpayers to
the level of underreported tax that will escape detection through the Department’s information exchange program
with the IRS. Without deciding whether such deletions come within any recognized confidentiality provision, I find
that the deleted information is not necessary to a resolution of the issues raised in this administrative protest.

2

8. On October 24, 2003, the Department issued an assessment under Letter ID No.

L0391334912 assessing Mr. Barnes for $946.00 of 1999 personal income tax, plus interest and

penalty accrued to the date of assessment.

9. On November 13, 2003, Mr. Barnes filed a written protest to the assessment.

DISCUSSION

Mr. Barnes’ November 13, 2003 Petition of Protest challenges the Department’s

assessment on three grounds: (1) that the “domestic income” Mr. Barnes received during 1999 is

not subject to federal or state income tax because it was not derived from a source listed in the

regulations to 26 CFR § 861; (2) that only the Secretary of the United States Treasury or his

delegate has authority to determine a taxpayer’s liability for federal and state income tax; and (3)

that the information exchanged between the IRS and the Department is based upon fraud and errors.

In Fikes v. Furst, 2003 NMSC 33, ¶ 11, 134 N.M. 602, 81 P.3d 545, the New Mexico

Supreme Court set out the following standard for reviewing a motion for summary judgment:

Summary judgment is the appropriate disposition if "there is no genuine issue as
to any material fact and ... the moving party is entitled to a judgment as a matter of
law." Rule 1-056(C) NMRA 2003. "Summary judgment may be proper even
though some disputed issues remain, if there are sufficient undisputed facts to
support a judgment and the disputed facts relate to immaterial issues." Oschwald
v. Christie, 95 N.M. 251, 253, 620 P.2d 1276, 1278 (1980). Once the movant
makes a prima facie case that summary judgment should be granted, the burden
"shifts to the opponent to show at least a reasonable doubt, rather than a slight
doubt, as to the existence of a genuine issue of fact." Ciup v. Chevron U.S.A.,
Inc., 1996 NMSC 62, P7, 122 N.M. 537, 928 P.2d 263.

See also, Madsen v. Scott, 1999 NMSC 42, ¶ 7, 128 N.M. 255, 992 P.2d 268; Roth v. Thompson,

113 N.M. 331, 335, 825 P.2d 1241, 1245 (1992). Based on the pleadings submitted by the parties

in this case, there are no genuine issues of material fact in dispute. As set forth below, the

3
resolution of Mr. Barnes’ protest rests entirely on interpretation of federal and state law, and

summary judgment is appropriate.

Issue One: Whether Mr. Barnes’ 1999 income is subject to New Mexico income tax.

The RAR provided to the Department establishes that Mr. Barnes received $29,593 of non-

employee compensation from Otero Enterprises Incorporated and $31 of interest from Conseco

Medical Insurance Company during the 1999 tax year. Mr. Barnes has not submitted any

evidence to dispute the income amounts shown on the RAR. In his Petition of Protest (at page

7), Mr. Barnes acknowledged that he had “domestic income within the United States” during

1999, but argued that this income is not subject to federal (and by extension, New Mexico)

income tax because it was not derived from a taxable source. In making his argument, Mr.

Barnes begins with 26 U.S.C. § 61(a) of the Internal Revenue Code, which defines “gross income”

as follows:

(a) General definition. Except as otherwise provided in this subtitle, gross income
means all income from whatever source derived, including (but not limited to) the
following items:

(1) Compensation for services, including fees, commissions, fringe benefits,
and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interest;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.

4
This definition is quite broad, and certainly appears to include the non-employee compensation and

interest Mr. Barnes received during 1999. He nonetheless disputes the applicability of § 61 to his

income, arguing that this section defines only “items” of income, and that an item of income is not

the same as a source of income. Mr. Barnes has determined that the only section of the Internal

Revenue Code defining sources of income is 26 U.S.C. § 861. He has further concluded that only

income from sources set out in the regulations at 26 CFR § 1.861-8 is subject to federal income tax.

Because Mr. Barnes’ 1999 “domestic income” does not come within the purview of those

regulations, he has concluded that this income is not subject to tax.

The argument Mr. Barnes raises, which is generally known of the “section 861 argument”

or the “U.S. Sources argument.” is not new. The federal courts have addressed—and universally

rejected—this argument on numerous occasions. See, e.g., United States v. Bell, 238 F.Supp.2d

696, 701 (M.D. Pa. 2003), modified, 414 F.3d 474 (3d Cir. 2005) (to suggest that the regulations

under § 861 create an exemption for domestic wages of U.S. citizens “is irresponsible and

frivolous advocacy”); Loofbourrow v. Comm'r of Internal Revenue, 208 F.Supp.2d 698, 709

(S.D. Tex. 2002) (plaintiff's § 861 argument “is without factual or legal basis”); Johnson v.

United States, 291 F.Supp.2d 1163, 1166 (D. Cal. 2003) (assertions that §§ 861-865 and related

regulations define or limit the definition of gross income are frivolous); Dashiell v. Comm'r of

Internal Revenue, T.C. Memo 2004-210 (2004) (courts which have addressed the § 861 argument

have rejected it as frivolous); Corcoran v. Comm’r of Internal Revenue, T.C. Memo 2002-18,

aff’d 54 Fed. Appx. 254 (9th Cir. 2002), cert. denied, 123 S.Ct. 2105 (2003) (the source rules of

§§ 861-865 do not exclude from taxation income earned by U.S. citizens from sources within the

United States); Williams v. Comm’r of Internal Revenue, 114 T.C. 136, 138 (U.S. Tax Court

5
2000) (petitioner’s § 861 arguments “are reminiscent of tax-protester rhetoric that has been

universally rejected by this and other courts”).

In recent years, federal courts have begun enjoining tax preparers and others who promote

the § 861 argument for profit. See, e.g., United States v. Bell, 414 F.3d 474 (3d Cir. 2005);

United States v. Cohen, 2005 U.S. Dist. LEXIS 17606 (D. Wash. 2005); United States v. Bosset,

2003 U.S. Dist. LEXIS 7947 (D. Fla. 2003); United States v. Farnell, 2003 U.S. Dist. LEXIS

2096 (D. Fla. 2003). In Revenue Ruling 2004-30, issued on March 22, 2004, the IRS specifically

warned taxpayers and tax preparers that filing returns based on the § 861 argument could result in

civil and criminal penalties:

This revenue ruling emphasizes to taxpayers, and to promoters and return
preparers who assist taxpayers with this scheme, that there is no authority in
sections 861 through 865 that permits an individual to take the position that either
the individual or the individual’s U.S.-based income is not subject to federal
income tax. This argument has no merit and is frivolous….

The Service is committed to identifying taxpayers who attempt to avoid their tax
obligations by taking frivolous positions, such as the Section 861 position. The
Service will take vigorous enforcement action against these taxpayers and against
promoters and return preparers who assist taxpayers in taking these frivolous
positions….

A discussion of the § 861 argument also appears in the IRS’s web-based publication entitled

Anti-Tax Law Evasion Schemes (found at www.irs.gov).

In Dashiell, supra, the United States Tax Court noted that “most courts would not dignify

petitioners' particular tax protester argument by addressing it at length in a written court

opinion.” Nonetheless, the court decided to provide the taxpayers in that case with a full analysis

of their § 861 argument “with the hope that petitioners will consider themselves personally

addressed, that they will consider themselves to have had their day in court, and that petitioners

6
will find such explanation persuasive and convincing and will come back into compliance with

the Federal income tax system.” With a similar hope, the Dashiell court’s analysis is set out

below for Mr. Barnes’ review:

With regard to the definition of income, section 61 expressly states that gross
income constitutes "all income" and expressly lists as one of the categories of
income "compensation for services" rendered by the taxpayer, which certainly
would include Gary's wages as a salesman and any fee income Fran received for
computer consulting. Sec. 61(a)(1). Also, section 61(a)(4) expressly lists
"interest," which certainly would include interest income petitioners received in
1997.

Section 1.1-1, Income Tax Regs., provides further as follows:

Sec. 1.1-1. Income tax on individuals. -- (a) General rule . (1) Section 1 of
the Code imposes an income tax on the income of every individual who is
a citizen or resident of the United States * * *.

(b) Citizens or residents of the United States liable to tax. In general, all
citizens of the United States, wherever resident, * * * are liable to the
income taxes imposed by the Code whether the income is received from
sources within or without the United States. * * *

The Supreme Court has defined income under section 61 broadly, noting that
Congress intended to tax as income "all gains except those specifically
exempted." Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-430, 99 L.
Ed. 483, 75 S. Ct. 473 (1955).

In Commissioner v. Schleier, 515 U.S. 323, 327-328, 132 L. Ed. 2d 294, 115 S.
Ct. 2159 (1995), the Supreme Court noted that because of the broad and inclusive
nature of section 61(a), an income item must be included in income for Federal
income tax purposes unless it is explicitly excluded by another provision of the
Code.

Petitioners point out that section 61(a) uses the word "source" but that section 61
does not go on to define the "sources" which produce income taxable by the
United States. Petitioners therefore conclude that in order to identify the
"sources" of income that are taxable reference must be made to the income
"sourcing" rules of sections 861-865 and to respondent's regulations thereunder,
specifically section 1.861-8(f)(1), Income Tax Regs.

7
Petitioners misread section 61. That section prefaces its use of the word "source"
by the word "whatever", thereby making the particular source of a U.S. taxpayer's
income (and the income sourcing rules of sections 861-865) irrelevant for
purposes of the definition of income under section 61. The precise language of
section 61(a) provides as follows:

Except as otherwise provided in this subtitle, gross income means all
income from whatever source derived, including (but not limited to) * * *.
[Emphasis supplied.]

It is helpful to read carefully the specific language from the regulations under
section 861 on which petitioners rely. The introductory language of section
1.861-8(f)(1), Income Tax Regs., states as follows:

(f) Miscellaneous matters -- (1) Operative sections. The operative sections
of the Code which require the determination of taxable income of the
taxpayer from specific sources or activities and which give rise to statutory
groupings to which this section is applicable include the sections described
below. [Emphasis added.]

As we have explained, section 61 does not "require the determination of
petitioners' taxable income from specific sources". Rather, section 61 explicitly
states that petitioners' income from "whatever" source constitutes income under
section 61. Therefore, since section 61 is not one of the "operative sections"
which require "specific" sourcing of items of income, section 61 is not affected by
section 1.861-8(f)(1), Income Tax Regs.

As the Court of Claims has explained:

The determination of where income is derived or “sourced" is generally of
no moment to either United States citizens or United States corporations,
for such persons are subject to tax under section 1 and section 11,
respectively, on their worldwide income. * * * [Great-West Life Assur.
Co. v. United States, 230 Ct. Cl. 477, 482, 678 F.2d 180, 183 (1982).]

Petitioners' narrow reading of section 61, under which the definition of income for
purposes of section 61 would be limited by the section 861 source-of-income
rules, is without any legal support and is erroneous….

Issue Two: Whether New Mexico Has the Legal Authority to Assess and Collect

State Taxes Independently of the IRS. As the second basis for his protest to the Department’s

assessment, Mr. Barnes argues that only the Secretary of the United States Treasury or his delegate

8
has the authority to determine state income tax. Petition of Protest at pages 9-10. Mr. Barnes bases

his argument on 26 CFR § 1.6001-1(a) and (d), which authorize IRS district directors to require

“any person subject to tax under Subtitle A of the Code (including a qualified state individual

income tax which is treated pursuant to section 6361(a) as if it were imposed by Chapter 1 of

Subtitle A)” to maintain permanent books of account and other records sufficient to establish the

amount of gross income, deductions, and credits reported on a return. Mr. Barnes misconstrues

these federal regulations—which deal solely with record retention requirements—to mean that all

assessments of tax must be made by district directors. Mr. Barnes also misconstrues the reference

to “qualified state individual income tax” to mean that only the federal government has authority to

determine and assess state income tax.

The term “qualified state individual income tax” originated with the Federal-State Tax

Collection Act of 1972, 26 U.S.C. §§ 6361-6365, which was designed to encourage states to

conform their personal income tax structure to that of the federal government. In furtherance of

this goal, the Act provided that a state with a "qualified state individual income tax," i.e., a tax

closely conforming to the model of the federal income tax, could enter into an agreement to have

the state's individual income taxes collected and administered by the federal government. As

noted in W. Hellerstein, Symposium on State and Local Taxation, 39 Vand. L. Rev. 1033, 1055

n. 31 (May 1986), none of the states chose to enter into such an agreement. Sections 6361-6365

were subsequently repealed in November 1990, nine years prior to the tax year at issue in Mr.

Barnes’ protest. Public Law 101-508, Title XI, § 11801(a)(45), 104 Stat. 1388-522.

In Franchise Tax Board v. United States Postal Service, 467 U.S. 512 (1984), the United

States Supreme Court addressed the scope of §§ 6361-6365 in deciding a challenge to

9
California’s authority to require the Postal Service to comply with the Franchise Tax Board’s

orders to withhold delinquent state income tax from employee wages. One of the arguments

raised by the Postal Service was that Congress intended states to use the provisions for collecting

state tax liabilities found in 26 U. S. C. §§ 6361-6365 and that California could not take direct

collection action against the Postal Service. The Supreme Court rejected this argument, stating

that “nothing in that statute, which permits States to use the summary collection procedures of

the Internal Revenue Service, limits the power of States to use any other available procedure.”

467 U.S. 512, 525 n.22. See also, Michigan Central Railroad Co. v. Powers, 201 U.S. 245, 292-

293 (1906) (with respect to state taxation, the state has the freedom of a sovereign, both as to

objects and methods).

There is no federal statute or case law supporting Mr. Barnes’ argument that only the

Secretary of the Treasury or his delegate may determine and assess New Mexico personal income

taxes. Nor does state law provide any authority for Mr. Barnes’ position. In Holt v. New Mexico

Department of Taxation & Revenue, 2002 NMSC 34, ¶ 9, 133 N.M. 11, 59 P.3d 491, the Mexico

Supreme Court specifically held that “the State of New Mexico has the authority to assess and

collect taxes without federal supervision.” The Holt decision is binding on all state courts and

administrative agencies and effectively disposes of Mr. Barnes’ argument on this issue. See

Alexander v. Delgado, 84 N.M. 717, 507 P.2d 778 (1973) (decisions of the New Mexico

Supreme Court are binding on all lower courts).

Issue Three: Whether the information exchanged between the IRS and the

Department is based upon fraud and errors. As the third ground for his protest, Mr. Barnes

maintains that the information exchanged between the IRS and the Department “is based upon

10
fraud and errors.” Petition of Protest at pages 10-15. Mr. Barnes argues that the Department should

not rely on the RAR it received from the IRS because it “may be based upon erroneous

information.” Petition of Protest at page 15. If the figures the IRS provided to the Department

concerning Mr. Barnes’ 1999 income were incorrect, it was up to him to correct the error by

producing his 1999 financial records for review. NMSA 1978, § 7-1-17(C) states that any

assessment of taxes made by the Department is presumed to be correct, and the burden is on the

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

2002 NMSC 34, ¶ 4, 133 N.M. 11, 59 P.3d 491. A taxpayer cannot shift the burden of proof to

the Department merely by suggesting that the assessment is wrong. As stated by the New

Mexico Court of Appeals in Grogan v. New Mexico Taxation & Revenue Department, 2003

NMCA 33, ¶ 12, (N.M. Ct. App., 2002):

The Department's assessment is presumed to be correct. NMSA 1978, § 7-1-
17(C) (1992); Carlsberg, 116 N.M. 247 at 249, 861 P.2d at 290. "The effect of
the presumption of correctness is that the taxpayer has the burden of coming
forward with some countervailing evidence tending to dispute the factual
correctness of the assessment made by the secretary. Unsubstantiated statements
that the assessment is incorrect cannot overcome the presumption of
correctness." 3.1.6.12(A) NMAC 2001. (Emphasis added).

In this case, Mr. Barnes has the most accurate and direct knowledge concerning the nature and

source of his income during the tax year at issue. By failing to provide any evidence to show that

the 1999 income figures the Department received from the IRS were incorrect, he failed to meet

his burden of proof on this issue.

The rest of Mr. Barnes’ arguments on Issue No. 3 are difficult to decipher. To the extent

he is asserting that the IRS’ release of his tax information violated the disclosure rules of 26

U.S.C. § 6103(d), his argument fails for two reasons.

11
First, federal courts have consistently held that the standard-form coordination and

implementation agreements the IRS has entered into with each of the 50 states meet the

disclosure requirements of § 6103(d). Smith v. United States, 964 F.2d 630 (7th Cir. 1992), cert.

denied, 506 U.S. 1067 (1993); 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 Memos 1998); McQueen v. United States, 5 F.Supp.2d 473 (D. Tex. 1998).

New Mexico entered into its Agreement on Coordination of Tax Administration with the Internal

Revenue Service in 1988. In 1989 and again in 1999, the Department entered into an

Implementation Agreement setting out the type of information to be exchanged between the IRS

and Department, including examination reports with respect to individual income tax

adjustments. Pursuant to settled case law, these agreements authorized the IRS’ release of Mr.

Barnes’ 1999 tax information to the Department.

Second, even if the IRS did not follow proper procedures in releasing information to the

Department, this is not the appropriate forum in which to raise that issue. Instead, Mr. Barnes’

remedy is found in 26 U.S.C. § 7431, which creates a federal cause of action for the improper

disclosure of an individual's return information. Suppression of such information is not one of

the remedies provided in § 7431. As stated in Nowicki v. Commissioner, 262 F.3d 1162, 1163

(11th Cir. 2001):

[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.

12
See also, United States v. Orlando, 281 F.3d 586, 595-596 (6th Cir. 2002). There is no legal

authority to support the argument that improper disclosure under § 6103 warrants abatement of

an otherwise valid state tax assessment.

IT IS THEREFORE ORDERED THAT the Department’s Motion for Summary

Judgment is granted, Mr. Barnes’ protest of the personal income tax assessment issued under Letter

ID L1666721792 is denied, and the administrative hearing currently scheduled for October 27,

2005 is vacated.

DATED October 17, 2005.

MARGARET B. ALCOCK
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

NOTICE OF RIGHT TO APPEAL
Pursuant to NMSA 1978, § 7-1-25, the taxpayer has the right to appeal this Order
Granting the Department’s Motion for Summary Judgment by filing a notice of appeal with the
New Mexico Court of Appeals within 30 days of the date shown above. See, NMRA, 12-601 of
the Rules of Appellate Procedure. If an appeal is not filed within 30 days, the order will become
final.

CERTIFICATE OF SERVICE
On October 17, 2005, a copy of the foregoing Order Granting the Department’s Motion for
Summary Judgment was mailed by both regular first class mail and certified mail # 7003 0500 0002
3966 6023 to Donald W. Barnes, Box 1224, Aztec, NM 87410, and delivered by interoffice mail to
Jeffrey W. Loubet, Special Assistant Attorney General, Taxation and Revenue Department, Santa
Fe, New Mexico.

MARGARET B. ALCOCK

13