Did New Mexico tax Joy Odom's Texas retirement distributions after she became a New Mexico resident?

Plain-English summary

Joy Odom's Texas retirement distributions were taxable by New Mexico because she was a New Mexico resident when she received them in 2005 and 2006. The source of the pension and the state where she earned it did not prevent resident-state taxation. Tax and interest were upheld, while penalty was reduced from the Department's 20% calculation to the 10% cap in force when the returns were due.

Odom received retirement income through the State of Texas and had never worked in New Mexico. She nevertheless lived in New Mexico during the two tax years and filed no New Mexico personal income-tax returns.

The Department discovered the nonfiling through federal-return matching and assessed tax, penalty, and interest in 2008. Odom argued that only Texas and the federal government could tax income earned through her Texas employment.

Residence controlled taxation of the pension

New Mexico imposed personal income tax on the net income of every resident. Its regulation specifically allocated a resident's retirement income to New Mexico regardless of the income's source, where the plan paid it from, or whether the person lived in New Mexico during the employment that produced it.

Federal law barred a state from taxing retirement income of a nonresident, which supported the same resident-state rule. The decision also relied on longstanding cases allowing a state to tax its residents' income attributable to activity in other states.

The tax fell on Odom when she received distributions as a New Mexico resident, not on the Texas retirement plan. New Mexico could therefore tax the full distributions.

The Department's federal-income figure was upheld

Odom said her federal returns showed less adjusted gross income than the Department used. The Department explained that she had excluded all Social Security benefits, while its worksheet showed that part was taxable. Completing the worksheet with her data produced the same adjusted gross income that the IRS reported to New Mexico.

Odom declined to explain her own Social Security calculation and did not overcome the assessment's presumption of correctness.

Missing follow-up information did not excuse nonfiling

When Odom moved to New Mexico, she called the Department and asked whether the pension would be taxable. She was told that information would be sent but received nothing. She interpreted the lack of follow-up as meaning no tax was due.

The decision treated that assumption as an erroneous belief supporting civil-negligence penalty. The Department was not barred from assessing within the seven-year period that applied when no return was filed; assessments in 2008 for 2005 and 2006 were timely.

Penalty was limited to the older 10% maximum

The Department used the 20% maximum effective in 2008. The 2005 and 2006 liabilities had already reached the prior statute's 10% ceiling before that amendment took effect. With no evidence of retroactive legislative intent, any penalty above 10% had to be abated.

Interest remained mandatory because the tax was not paid when due.

Result: tax, interest, and a 10% negligence penalty remained due; penalty above the 10% cap was abated.

What this means for you

Retirees moving to New Mexico

Expect New Mexico to tax retirement distributions received while you are a resident even if the employment, pension system, and prior residence were in another state.

Taxpayers with Social Security benefits

The taxable portion affects federal adjusted gross income and therefore the New Mexico starting point. Retain the federal worksheet supporting the amount reported.

Taxpayers waiting for agency information

Do not treat a missing brochure or follow-up letter as a determination that no return is required. Verify the rule and document any advice before deciding not to file.

Common questions

Q: Did it matter that Odom never worked in New Mexico?
A: No. She was a New Mexico resident when she received the retirement distributions.

Q: Could Texas also tax the retirement income?
A: The decision did not decide any Texas liability. It focused on New Mexico's right to tax its resident and cited federal law barring a state from taxing a nonresident's retirement income.

Q: Why was the Department's adjusted gross income accepted?
A: Its Social Security worksheet matched the amount reported by the IRS, and Odom did not substantiate her different calculation.

Q: Were the 2008 assessments too late?
A: No. A seven-year assessment period applied because Odom filed no New Mexico returns.

Q: What penalty rate survived?
A: A maximum of 10%, the cap in effect when the 2005 and 2006 taxes became due.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-2-3, 7-2-2(N), and 7-2-11 — resident income tax, federal adjusted gross income, and multistate income
• Regulation 3.3.11.13(B) NMAC (2000) — resident retirement income allocated to New Mexico regardless of source
• 4 U.S.C. § 114 — state taxation of retirement income based on residence
• NMSA 1978, § 7-1-18(C) — seven-year assessment period for nonfilers
• NMSA 1978, § 7-1-69 (2003 and 2008 versions) — negligence penalty and maximums
• NMSA 1978, § 7-1-67(A) — mandatory interest

Cases cited:

• Shaffer v. Carter, 252 U.S. 37 (1919)
• Lawrence v. State Tax Commission of Mississippi, 286 U.S. 276 (1932)
• Alarid v. Secretary of New Mexico Taxation and Revenue Department, 118 N.M. 23 (Ct. App. 1994)
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16 (Ct. App. 1976)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784 (1993)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Joy Odom
• Decision PDF: D&O 11-04

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
JOY ODOM, No. 11-04
TO ASSESSMENTS ISSUED UNDER
ID NOS. L0473297280 and L0785941888

DECISION AND ORDER

A formal hearing on the above-referenced protest was held December 28, 2010, before

Dee Dee Hoxie, Hearing Officer. The Taxation and Revenue Department ("Department") was

represented by Ms. Amy Chavez-Romero, Special Assistant Attorney General. Ms. Andrea

Umpleby, Auditor, also appeared on behalf of the Department. Ms. Joy Odom (“Taxpayer”)

appeared for the hearing by telephone and represented herself. The parties had filed a joint

motion for the Taxpayer to appear by phone, which was granted. The Hearing Officer took

notice of all documents in the administrative file. TRD #1 through #32 were admitted at the

hearing. Taxpayer “A” through “E” were admitted at the hearing. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Taxpayer was a New Mexico resident in 2005 and 2006.

2. Taxpayer received retirement income distributions in 2005 and 2006.

3. Taxpayer failed to file personal income tax with the Department for 2005 and 2006.

4. The Department determined that Taxpayer was a non-filer on personal income tax for

2005 and 2006 through her federal tax return, which was reported to the Department

through the tape match system.

5. On April 25, 2008, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2005.

6. On October 27, 2008, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2006.

7. On May 2, 2008, September 27, 2008 and October 28, 2008, Taxpayer filed formal

protest letters regarding the assessments.

8. On October 21, 2010, the Department filed a Request for Hearing asking that the

Taxpayer’s protests be scheduled for a formal administrative hearing.

9. Taxpayer argues that her income was from her retirement through the state of Texas, that

she never worked in New Mexico, and that her retirement income is not subject to New

Mexico tax.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for personal income tax, penalty,

and interest for the tax periods ending in December 2005 and December 2006, due to her failure

to file personal income tax returns on distributions from her retirement account in Texas.

Burden of Proof.

Assessments by the Department are presumed to be correct. See NMSA 1978, § 7-1-17.

Tax includes, by definition, the amount of tax principal imposed and, unless the context

otherwise requires, “the amount of any interest or civil penalty relating thereto.” NMSA 1978, §

7-1-3. See also, El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M.

795, 779 P.2d 982 (Ct. App. 1989). Therefore, the assessment issued to the Taxpayer is presumed

to be correct, and it is the Taxpayer’s burden to present evidence and legal argument to show that

she is not liable for the tax and is entitled to an abatement of penalty and interest.

In the Matter of Joy Odom, page 2 of 7
Personal Income Tax on Retirement Income.

Taxpayer argues that only Texas and the federal government may tax the distributions on

her retirement income because the account is maintained by the state of Texas and because she

earned the income contributed to the account while she was working in Texas. Taxpayer argues

that New Mexico may only tax wages earned from work done in New Mexico and that she never

worked in New Mexico.

The Department argues that the state of residence has the right to tax a person who

receives retirement distributions, regardless of where the person worked when contributing to the

retirement plan.

The State imposes a tax upon the net income of every person who resides within New

Mexico. See NMSA 1978, § 7-2-3 (1981). Net income is based in part on federal adjusted gross

income. See NMSA 1978, § 7-2-2 (N) (2007) (the 2003 version would have been in effect at the

time of Taxpayer’s liabilities, but the substance of this section at that time was essentially the

same as the current version). Some income may be taxable both in New Mexico and in another

state. See NMSA 1978, § 7-2-11 (2001) (allowing allocation and apportionment of tax on

income that is taxable in New Mexico as well as in another state). However, some types of

income must be allocated solely to New Mexico, regardless of the source of the income.

“Retirement income of a resident is allocable to New Mexico, regardless of the source of the

retirement income, where it is paid from or whether the resident was a resident of New Mexico at

the time of the employment which gave rise to the income.” 3.3.11.13 (B) NMAC (2000). The

regulation complies with federal law which prohibits any state from imposing an income tax on

the retirement income of an individual who is not a resident of that state. See 4 U.S.C. § 114. A

state may only impose an income tax on retirement income of its residents. See id.

In the Matter of Joy Odom, page 3 of 7
States have long had the right to tax the income of their residents, including income

attributable to activities in other states. See Shaffer v. Carter, 252 U.S. 37, 51 (1919) (holding

that states have wide latitude to tax their own people). See also Lawrence v. State Tax

Commission of Mississippi, 286 U.S. 276 (1932) (upholding a state’s right to tax a resident on

income earned in another state). Taxpayer argues that she should not be taxed by New Mexico

merely because she resides there. However, it is a long-standing principle that “domicile in itself

establishes a basis for taxation.” Id. at 279. Taxpayer argues that New Mexico is taxing Texas

because the retirement account is maintained by Texas. New Mexico tax on retirement income

falls on the taxpayer, not the pension fund, when the funds are distributed to the taxpayer and the

taxpayer is a resident of New Mexico. See Alarid v. Secretary of NM Dep’t. of Taxation and

Revenue, 118 N.M. 23, 28, 878 P.2d 341, 346 (Ct. App. 1994). The vast majority of New

Mexico residents who have retirement income are subject to New Mexico personal income tax.

See id. at 29.

Taxpayer was a resident of New Mexico in 2005 and 2006 when she received income

from distributions from her retirement plan. New Mexico has the right to impose income tax on

the total amount of those retirement distributions.

Amount of Tax.

Taxpayer disputes the amount of tax liability claimed by the State. Taxpayer argues that

her federal returns, Taxpayer “A” and “B”, show that her federal adjusted gross income (AGI) is

less than the amount that the Department used in its calculations. Ms. Umpleby explained that

the Department used the AGI amount that was provided by the IRS. Ms. Umpleby also

explained that the discrepancy occurred because the Taxpayer excluded the total amount of her

social security benefits from the taxable amount on her federal return. However, Ms. Umpleby

In the Matter of Joy Odom, page 4 of 7
used the federal worksheet on social security benefits, and completed it using the Taxpayer’s

information in TRD #8 and #14. The worksheet indicated that a part of the Taxpayer’s social

security benefits were taxable, and the amount on the worksheet resulted in a total AGI that

matched the amount that the IRS had also reported to the Department in TRD #6B and #12B.

The Taxpayer declined to explain how she did the worksheet and arrived at the

conclusion that none of her social security benefits were taxable. The Taxpayer claimed that the

information on the worksheet was her business and no one else’s. The Taxpayer failed to

overcome the presumption of correctness on the amount of the tax owed.

Assessment of Penalty.

Taxpayer argues that the Department should be precluded from collecting penalty and

interest on the personal income tax for 2005 and 2006, because it never notified her that she

would owe personal income tax on the distributions and should have notified her of her

obligation in a timelier manner. Taxpayer called the Department when she moved to New

Mexico and inquired whether she would have to pay personal income tax on her retirement

income. Taxpayer was told that she would be sent information, but she never received anything

from the Department. Taxpayer took the lack of follow-up information to mean that she did not

owe personal income tax.

A taxpayer’s lack of knowledge or erroneous belief that the taxpayer did not owe tax is

considered to be negligence for purposes of assessment of penalty. See Tiffany Const. Co., Inc. v.

Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976). Therefore, the penalty was

properly assessed.

Computation of Penalty.

In the Matter of Joy Odom, page 5 of 7
On both of the assessments issued in this matter, the Department seeks to impose a

penalty of up to 20% under NMSA 1978, § 7-1-69 (2008). The assessments were issued for taxes

due in 2006 and 2007 for the 2005 and 2006 tax years, respectively. The applicable penalty statute

in effect for both the 2005 and 2006 tax years was capped at a maximum penalty of 10%. See

NMSA 1978, § 7-1-69 (2003). At a maximum penalty not to exceed 10%, the penalty provision

had been exhausted for both the 2005 and 2006 tax years before the January 1, 2008 effective date

of NMSA 1978, Section 7-1-69 (2008). Ms. Umpleby testified that the Department had assessed a

20% cap because the tax was still outstanding after the effective date of the 2008 amendment and

pointed out on TRD #9 and #15 that additional penalty was added after the effective date in 2008.

Without evidence of legislative intent for retroactive application of NMSA 1978, Section 7-1-69

(2008), the outstanding tax due for tax years 2005 and 2006 were subject to a penalty “not to

exceed” 10% pursuant to NMSA 1978, Section 7-1-69 (2003) because that was the provision in

effect at the time the tax was due. See Kewanee Industries, Inc. v. Reese, 114 N.M. 784, 845 P.2d

1238 (1993) (holding that a modified penalty regulation would not apply retroactively when the

regulation was enacted after the applicable tax year).

Assessment of Interest.

Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

due. NMSA 1978, § 7-1-67 (A). The word “shall” indicates that the assessment of interest is

mandatory, not discretionary. See State v. Lujan, 90 N.M. 103, 105, 560 P.2d 167, 169 (1977).

The assessment of interest is not designed to punish taxpayers, but to compensate the state for the

time value of unpaid revenues. Because the personal income tax was not paid when it was due,

interest was properly assessed.

Timeliness of Assessment.

In the Matter of Joy Odom, page 6 of 7
The Department has seven years from the end of the year in which the tax is due to make

an assessment when the taxpayer failed to file any return. See NMSA 1978, § 7-1-18 (C).

Although Taxpayer feels that the Department should have known that she owed the liability

earlier, the statute governs the timeliness of an assessment. Taxpayer was assessed in 2008 for

the 2005 and 2006 tax years. Therefore, the assessments were made in a timely manner. See id.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely written protest to the Notice of Assessment of 2005 and

2006 personal income taxes issued under respective Letter ID numbers L0473297280 and

L0785941888, and jurisdiction lies over the parties and the subject matter of this protest.

2. Taxpayer was properly assessed for personal income tax and interest for the 2005

and 2006 tax years.

3. The assessment of penalty for the 2005 and 2006 tax years was appropriate.

However, the computation of penalty was incorrect. Penalty is capped at an amount not to exceed

10%. The amount of any penalty assessed in excess of the 10% cap is hereby abated.

For the foregoing reasons, the Taxpayer's protest is GRANTED IN PART AND DENIED

IN PART.

DATED: February 10, 2011.

In the Matter of Joy Odom, page 7 of 7