Was Aurelia Shorty's 2005 Navajo Nation teaching income exempt when she worked on tribal land but lived in a Gallup apartment?

Plain-English summary

Aurelia Shorty's 2005 teaching income was not exempt from New Mexico personal income tax because she worked on the Navajo Nation but did not live within its boundaries. She remained liable for tax, interest, and civil-negligence penalty, but the penalty was reduced from the Department's retroactive 20% calculation to the 10% maximum in force when the tax became due.

Shorty was an enrolled Navajo Nation member and taught year-round at Mariano Lake Community School in Crownpoint. The school was on the Navajo Nation and administered by the federal Bureau of Indian Education. The Department agreed that all her 2005 income came from work performed within the Nation's boundaries.

Shorty also held her family's home-site lease near Wood Springs, Arizona. Navajo cultural tradition made that site her permanent home in an important sense: her umbilical cord was buried there, she stored cultural possessions in its Hogan, and she intended to retire there. But the mobile home had burned down, the fixed house had been vandalized and was uninhabitable without substantial rebuilding, and she did not stay at the site when returning for family or ceremonial purposes.

Working on tribal land was only part of the exemption

Section 7-2-5.5 required both qualifying income earned from work within tribal boundaries and that the member “lives within the boundaries.” The decision treated that phrase as focused on continuing physical presence, not solely on a person's intent about a permanent home.

Since 2003, Shorty had rented a two-bedroom, separately metered apartment in Gallup. In 2005 she paid water, cable, and telephone bills there, used the address for her bank account and federal return, and held a New Mexico driver's license and vehicle registrations. She said the apartment offered available housing and a convenient commute to the school.

Because her teaching position ran year-round and she resided in Gallup while working, the hearing officer found that she was physically present in New Mexico for at least 185 days and likely substantially more. She did not prove a continuing physical presence within the Navajo Nation during 2005, so the exemption failed.

The domicile factors did not change the result

The decision also considered domicile as an alternative analysis. Shorty's Navajo Nation employment, Kinlichee Chapter affiliation, tribal voting, cultural possessions, and intent to return supported her position. Her time spent in Gallup, bank and federal-return address, New Mexico license and registrations, and the usable Gallup apartment supported the Department.

With the factors at best evenly balanced and the assessment presumed correct, Shorty did not carry her burden. The decision emphasized that this did not discount her genuine cultural and community connections or her future intent to rebuild at the home site.

Penalty applied, but only at the older 10% cap

As of the hearing, Shorty owed $3,061 of tax, $1,277.99 of interest, and $612.20 of penalty. Her belief that the exemption applied was not fraudulent, but the cited regulation treated erroneous belief, inadvertence, or inattention as civil negligence. She presented no evidence establishing nonnegligence, so penalty was mandatory.

The Department had calculated penalty at 20% under the version of Section 7-1-69 effective in 2008. Shorty's 2005 tax was due April 15, 2006, and the prior statute capped penalty at 10%. That cap had been reached in September 2006, before the amendment took effect. Applying another 10% would attach a new burden to a past transaction without clear retroactive authorization.

Result: the income-tax exemption was denied, but $306.10 of penalty was abated, leaving the penalty at 10% of principal.

What this means for you

Tribal members working on tribal lands

On-reservation work alone did not satisfy the statute applied here. The member also had to live within the tribal boundaries during the relevant year.

People with cultural and permanent-home ties elsewhere

Intent and deep cultural connections did not substitute for physical presence under this decision's reading of “lives within.” Evidence about where the taxpayer actually stayed during the year was decisive.

Taxpayers with a pre-2008 liability

Check the version of the penalty statute in force when the tax became due. This order refused to reopen a completed 10% penalty calculation under the later 20% cap.

Common questions

Q: Did Shorty earn all her income on the Navajo Nation?
A: Yes. The Department did not dispute that her 2005 income came from teaching at a school on the Nation.

Q: Why did the exemption still fail?
A: She primarily lived in Gallup while working year-round and did not prove that she lived within tribal boundaries during 2005.

Q: Did she own a Navajo Nation home site?
A: She held the family home-site lease and intended to retire there, but its residential structures were uninhabitable and she stayed with relatives during visits.

Q: Was the failure to claim tax treated as fraud?
A: No. The case involved civil negligence based on erroneous belief or inattention, not fraud.

Q: How much penalty was removed?
A: $306.10. The assessed $612.20 represented 20% of the $3,061 principal, and the proper cap was 10%.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-5.5 (1995) and Regulation 3.3.4.12 NMAC — tribal-member income exemption
• NMSA 1978, § 7-2-2(S) (2003) and Regulation 3.3.1.9 NMAC — residency, physical presence, and domicile
• NMSA 1978, § 7-1-17(C) (2007) — presumption that assessments are correct
• NMSA 1978, § 7-1-69 (2003 and 2008 versions) — civil-negligence penalty and maximums
• Regulations 3.1.11.10-.11 NMAC — negligence and nonnegligence
• NMSA 1978, § 7-1-4.2 (2003) — right not to pay an incorrect, erroneous, or illegal assessment

Cases cited:

• McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1972)
• El Centro Villa Nursing Center v. Taxation and Revenue Department, 108 N.M. 795 (Ct. App. 1989)
• Psomas v. Psomas, 99 N.M. 606 (1982)
• Kewanee Industries, Inc. v. Reese, 114 N.M. 784 (1993)

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aurelia Shorty
• Decision PDF: D&O 11-17

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
AURELIA SHORTY No. 11-17
TO ASSESSMENT ISSUED UNDER LETTER
ID NO. L0089824640

DECISION AND ORDER

A hearing was held on the above captioned matter on July 21, 2011 before Brian

VanDenzen Esq., Hearing Officer, in Santa Fe. Ms. Aurelia Shorty (“Taxpayer”) appeared along

with attorney Claudia Crawford. The Taxation and Revenue Department of the State of New

Mexico (“Department”) was represented by Staff Attorney Peter Breen, Taxation and Revenue

Department. Protest Auditor Thomas Dillon appeared as a witness for the Department. In

addition to the documents contained in the Administrative File articulated during the beginning

of the hearing, Taxpayer #1-6 and Department A, B, C, E, and H are admitted into the record.

Based on the evidence and arguments presented, IT IS DECIDED AND ORDERED AS

FOLLOWS:

FINDINGS OF FACT

1. Taxpayer is an enrolled tribal member of the Navajo Nation. [Taxpayer #2 &

Taxpayer #3].

2. Taxpayer is a member of the Kinlichee Chapter near Ganado, Arizona.

3. Taxpayer is a registered voter only at Kinlichee Chapter on the Navajo Nation.

4. Taxpayer has only voted on the Navajo Nation.

5. Taxpayer has family in Ganado, Arizona.

6. Taxpayer’s parents, whom are both deceased, had a home site lease in the Navajo

Nation near Wood Springs, Arizona, which is some 8-miles northeast of Ganado, Arizona.

7. Since Taxpayer is the only surviving immediate family member, Taxpayer is the

only person with an interest in this home site lease.

8. At the home site lease, there is a Hogan, a burnt-down mobile home, and a

permanently fixed physical home.

9. Because of vandalism over the years, the mobile home and the permanently fixed

physical home are not habitable, as least without significant rebuilding.

10. Because of cultural tradition, even if the permanently fixed physical home was

habitable, Taxpayer would likely rebuild the home because it is the location where her mother

passed on.

11. Under Navajo cultural tradition, Taxpayer considers her home site lease on the

Navajo Nation in Wood Springs, AZ her permanent home because her umbilical cord is buried at

that location.

12. The Hogan on the home lease site remains in good condition, and because of the

limited access into the Hogan, Taxpayer is able to maintain many of her most important cultural

possessions in the Hogan.

13. Taxpayer intends to retire to her family’s home site lease. However, before she

can do so, Taxpayer will need to rebuild a structure there as both the mobile home and the fixed

residential home are not inhabitable as is.

14. In order to save money, Taxpayer pays no utility bills at the home site lease in

Wood Springs, AZ.

In the Matter of the Protest of Aurelia Shorty, page 2 of 21

15. Taxpayer regularly returns to Ganado for family and ceremonial purposes.

16. However, when Taxpayer returns to the Ganado area, she stays with extended

family near the Kinlichee Chapterhouse rather than at her home site lease in Wood Springs.

17. Taxpayer owns no other real property outside of the borders of the Navajo Nation

and has no intention to ever buy any real property in New Mexico.

18. Taxpayer was and is a teacher working for the United States Department of the

Interior, Bureau of Indian Education.

19. As part of her employment, Taxpayer has traveled to different schools across the

Navajo Nation as required, including schools in both Arizona and New Mexico.

20. Beginning in 2001, and continuing through tax year 2005, Taxpayer was

employed exclusively as an educator at Mariano Lake Community School in Crownpoint, New

Mexico. [Taxpayer #1]

21. Mariano Lake Community School is located on the Navajo Nation and is

administered by the United States Department of the Interior, Bureau of Indian Education.

[Taxpayer #1]

22. All of Taxpayer’s income in 2005 came from her work performed within the

Navajo Nation for the Mariano Lake Community School.

23. Taxpayer worked year-round at Mariano Lake Community School.

24. Mariano Lake Community School had insufficient on-campus housing available

for staff rental. Consequently, about half the staff lived outside of Crownpoint.

25. Since 2003, including Tax Year 2005, Taxpayer rented a 2-bedrooom, 1-bath

apartment at 1013 E. Mesa Ave. #1 in Gallup, New Mexico.

In the Matter of the Protest of Aurelia Shorty, page 3 of 21

26. Taxpayer’s apartment at 1013 E. Mesa Ave. #1 in Gallup, New Mexico is a

separately metered apartment for utility purposes.

27. In 2005, Taxpayer paid for a water bill, a cable bill, and a phone bill for utilities at

her apartment at 1013 E. Mesa Ave. #1 in Gallup, New Mexico.

28. In tax year 2005, Taxpayer had a bank account with Bank of America listing her

address as 1013 E. Mesa Ave. #1 in Gallup, New Mexico. [Department H]

29. In tax year 2005, Taxpayer filed her federal income tax returns listing her address

as 1013 E. Mesa Ave. #1 in Gallup, New Mexico. [Department H]

30. Beginning in tax year 2006, Taxpayer filed and paid her personal income taxes in

New Mexico, self-identifying herself as a New Mexico resident and listing her address as 1013

E. Mesa Ave. #1 in Gallup, New Mexico. [Department B]

31. Because of the close proximity to her Gallup apartment, Taxpayer maintains a

P.O. Box address in Window Rock, Arizona rather than in Ganado, Arizona.

32. Taxpayer presented one letter she received from Benjamin Curley on July 3, 2009

at her P.O. Box address in Window Rock, Arizona, [Taxpayer #6]

33. In 1995, Taxpayer, whom had previously been licensed in Arizona, applied for a

New Mexico driver’s license, a license she maintained in 2005.

34. Beginning in 2003, and including tax year 2005, Taxpayer had registered her

primary vehicle, a Nissan, in New Mexico.

35. Taxpayer also has a 1964 Volkswagen Bug registered in New Mexico.

36. Taxpayer registered her father’s former 1979 Ford pick-up truck, which had

previously been registered in Arizona, in New Mexico. Taxpayer had this truck towed from the

home site lease in Wood Springs, AZ to her apartment in Gallup, where the vehicle remains.

In the Matter of the Protest of Aurelia Shorty, page 4 of 21

37. After tax year 2005, the Taxpayer registered in her name a truck and a traveler

trailer in New Mexico rather than Arizona. Taxpayer, however, indicated that both of these

vehicles are paid for and used by her long term friend Clinton Trujillo. When Clinton Trujillo is

not working as union oil pipeline worker at various locations across the west, the truck and travel

trailer are parked at Taxpayer’s apartment in Gallup.

38. On August 12, 2009, the Department assessed Taxpayer for unfiled and unpaid

tax tear 2005 personal income tax, penalty, and interest.

39. On September 2, 2009, Taxpayer through attorney Linda Quezada filed a written

request for an extension of time to file a protest of the assessment.

40. On September 21, 2009, the Department granted the Taxpayer’s request for an

extension of time to file a formal protest, giving the Taxpayer until November 10, 2009 to file

such a protest.

41. On November 6, 2009, Taxpayer filed a formal written protest to the assessment.

42. On November 17, 2010, the Department requested a protest hearing.

43. On November 24, 2010, the Hearing Bureau of the Taxation and Revenue

Department sent notice of hearing, setting this matter for hearing on July 21, 2011.

44. As of the date of the scheduled hearing, Taxpayer owed $3,061.00 in unpaid

principal tax, $612.20 in penalty (calculated at the maximum 20%), and $1277.99 in unpaid

interest (accumulating at $0.34 per day).

DISCUSSION

At issue in this matter is whether for Tax Year 2005 (“TY05”), the Taxpayer’s personal

income was exempt from New Mexico Personal Income tax pursuant to NMSA 1978, §7-2-5.5

In the Matter of the Protest of Aurelia Shorty, page 5 of 21
(1995). Taxpayer and the Department are in agreement that the Taxpayer was an enrolled

member of the Navajo Nation in TY05, and earned all of her personal income while working

under contract for the United States Department of the Interior, Bureau of Indian Education at

Mariano Lakes Community School on the Navajo Nation in TY05. The only issue in dispute is

whether under NMSA 1978, §7-2-5.5 (1995), Taxpayer “lived within the boundaries” of the

Navajo Nation or lands held in trust for the Navajo Nation during TY05.

Presumption of Correctness and Burden of Proof.

Under NMSA 1978, Section 7-1-17(C) (2007), the assessment issued in this case is

presumed to be correct. Consequently, the Taxpayer has the burden to overcome the assessment

and establish that he or she was not required to pay the assessment. See Archuleta v. O'Cheskey,

84 N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).

Personal Income Tax and the Exemption.

Payment of New Mexico personal income tax is governed by NMSA 1978, §§ 7-2-1, et

seq. Unless otherwise exempted by law, a tax is imposed “upon the net income of every” New

Mexico resident. NMSA 1978, §7-2-3 (1981).

Under NMSA 1978, §7-2-5.5 (1995), “Exemption; earnings by Indians, their Indian

spouses and Indian dependants on Indian lands,”

Income earned by a member of a New Mexico federally recognized
Indian nation, tribe, band or pueblo, his spouse or dependent, who
is a member of a New Mexico federally recognized Indian nation,
tribe, band or pueblo, is exempt from state income tax if the
income is earned from work performed within and the member,

In the Matter of the Protest of Aurelia Shorty, page 6 of 21
spouse or dependent lives within the boundaries of the Indian
member's or the spouse's reservation or pueblo grant or within the
boundaries of lands held in trust by the United States for the
benefit of the member or spouse or his nation, tribe, band or
pueblo, subject to restriction against alienation imposed by the
United States.

If Taxpayer can demonstrate that she was entitled to the exemption under NMSA 1978, §7-2-5.5

(1995) in TY05, then income attributable to Taxpayer in TY05 would not be subject to New

Mexico personal income tax.

The exemption under NMSA 1978, §7-2-5.5 (1995) can be broken down further into

three elements. First, there must be earned income by a member of a New Mexico federally

recognized Indian nation. See id. In this case, the evidence clearly established—and the

Department does not dispute—that the Taxpayer is a member of a federally recognized Indian

Nation, the Navajo Nation.

The second element under NMSA 1978, §7-2-5.5 (1995) is that the earned income

derived from work performed within the boundaries of the Indian member’s or spouses’ land.

See id. The statute and the accompanying regulation are silent on how income should be

attributed under this derived from element. The seminal federal case on the prohibition of state

personal income taxes on tribal members from income derived from within tribal territory is

McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1972). In McClanahan, the

United States Supreme Court held that Arizona could not impose a state personal income tax on

a tribal member whose income “derived wholly from reservation resources.” id. at 179. Since

there is no clear State standard to analyze the term “work performed within”, and the regulation

recognizes the limitations imposed by federal law, the standard articulated by McClanahan that

In the Matter of the Protest of Aurelia Shorty, page 7 of 21
the income must be “derived wholly from reservation resources” is controlling in determining

when a tribal member’s income is exempt from state income tax.

Again, the evidence is clear in this case that in TY05, Taxpayer derived her income

wholly from reservation resources from work performed within the boundaries of the Navajo

Nation as a teacher at Mariano Lakes Community School in Crownpoint, New Mexico. The

Department does not contest this portion of the Taxpayer’s claim for exemption. This work

activity as a teacher satisfies both the statutory and regulatory requirements that the income

derive “from… activities on the tribal territories”. See 3.3.4.12(C) NMAC (5/15/2001).

The third element under NMSA 1978, §7-2-5.5 (1995) presents the controversy in this

matter: the “member, spouse or dependent” claiming the exemption “lives within the

boundaries” of the applicable tribal land. Neither the statute nor the regulation interpreting the

statute provide a definition, standard, or test to determine what is meant to “live within the

boundaries” of tribal land. Implicit in the presentation of the Taxpayer’s case is an argument for

the application of NMSA 1978, § 7-2-2 (S) (2003) and Regulation 3.3.1.7 NMAC (4/29/2005),

which collectively addresses residency and domicile factors, in order to determine whether

Taxpayer “lived within the boundaries” of tribal land during TY05. The Department did not

contest the Taxpayers’ position that the residency and the application of the domicile factors

listed by regulation is the appropriate method to determine whether Taxpayer “lived within”

Navajo Nation during the relevant time frame.

However, before even turning to Taxpayer’s domicile argument, a close reading of the

exemption does not necessarily support the Taxpayer’s contention that domicile is the

appropriate method of analysis to determine living within. The exemption never uses the words

“residency” or “domicile.” Nor does the exemption statue NMSA 1978, §7-2-5.5 (1995) cross

In the Matter of the Protest of Aurelia Shorty, page 8 of 21
reference the New Mexico statutes and regulations on residency and domicile, NMSA 1978, § 7-

2-2 (S) (2003) and Regulation 3.3.1.7 NMAC (4/29/2005). Despite the fact that the legislature

was aware of the meaning of “residency” and “domicile” given NMSA 1978, § 7-2-2 (S) (2003)

and could have chosen to use either term under the exemption, the legislature choose to use the

distinct phrase “lives within.” The accompanying regulation under the exemption, Regulation

3.3.4.12 NMAC (5/15/01), neither defines what is meant by “lives within” nor references the

words “residency” or “domicile.”

Unlike “domicile”, which deals a great deal with a person’s intent, the term “lives within”

suggests a continuing physical presence inside a defined geographical boundary. At the very

least, the value of physical presence within a boundary as opposed a person’s intent is elevated

by the legislature’s use of the phrase “lives within.” Under that standard—continuing physical

presence inside a defined geographical boundary—the Taxpayer fails to carry her burden of

proof. Because Taxpayer indicated that her job as a teacher a Mariano Lake Community School

is a year-round position and that while working, she resided at her apartment in Gallup for

convenience sakes, there is little doubt that the Taxpayer was physically present in Gallup, New

Mexico and not the Navajo Nation during TY05 for at least 185-days, and likely significantly

more time than 185-days. If the Taxpayer lived within the boundaries of Gallup, New Mexico

during TY05 for at least 185-days, the Taxpayer could not have “lived within” the Navajo Nation

during that period of time even if she believed and intended her home to be in Wood Springs,

Arizona. Consequently, under the plain language of the exemption, the Taxpayer failed to

establish that she “lived within” the Navajo Nation during TY05.

In the Matter of the Protest of Aurelia Shorty, page 9 of 21
Residency and Domicile.

Although Taxpayer failed to establish that she “lived within” the Navajo Nation under the

plain language of the exemption statute, because residency and domicile were essential parts of

the Taxpayer’s argument and the Department’s counter-argument, residency and domicile still

will be considered for the sake of argument as part of this decision.

NMSA 1978, § 7-2-2 (S) (2003) of the Income Tax Act defines the term “resident” as:

an individual who is domiciled in this state during any part of the taxable
year or an individual who is physically present in this state for one
hundred eighty-five days or more during the taxable year; but any
individual, other than someone who was physically present in the state for
one hundred eighty-five days or more during the taxable year, who, on or
before the last day of the taxable year, changed the individual's place of
abode to a place without this state with the bona fide intention of
continuing actually to abide permanently without this state is not a resident
for the purposes of the Income Tax Act [7-2-1 NMSA 1978] for periods
after that change of abode;

Regulation §3.3.1.9(A) NMAC (4/29/2005) mirrors this statutory definition almost exactly by

stating that a resident is either an individual who is domiciled in New Mexico or an individual

who is physically present in New Mexico for a total of 185-days or more during the tax year. In

other words, by statute and regulation there are two possible basis of residency in New Mexico:

either the person was physically present in New Mexico for 185-days or the person was

domiciled within the state during any part of the tax year.

The evidence in this case suggests that the Taxpayer was physically present in New

Mexico during TY05 for at least 185-days. At the very least, the Taxpayer failed to carry her

burden to overcome the assessment by showing that she was physically present in New Mexico

for less than 185-days. Since the Taxpayer was likely physically present in New Mexico for at

In the Matter of the Protest of Aurelia Shorty, page 10 of 21
least 185-days during TY05, the Taxpayer would qualify as a resident of New Mexico and not

the Navajo Nation for income tax purposes under NMSA 1978, § 7-2-2 (S) (2003).

Even considering for the sake of argument the other possible basis of residency under

statute and regulation, domicile, the Taxpayer fails to carry her burden. That is not to say that the

Taxpayer lacks a genuine intention to return to her home site lease on the Navajo Nation at some

point in the future. Only that under the numerous domicile factors articulated by the regulation,

too many factors weight against the Taxpayer for the Taxpayer to carry her burden to overcome

the assessment.

Regulation §3.3.1.9 NMAC (4/29/2005) defines “domicile” as the

place where an individual has a true, fixed home, is a permanent
establishment to which the individual intends to return after an absence,
and is where the individual has voluntarily fixed habitation of self and
family with the intention of making a permanent home. Every individual
has a domicile somewhere, and each individual has only one domicile at a
time.

To determine domicile, Regulation §3.3.1.9(C)(4) NMAC (4/29/2005) provides twelve domicile

factors to consider:

(a) homes or places of abode owned or rented (for the individual's
use) by the individual, their location, size and value; and how they are
used by the individual;
(b) where the individual spends time during the tax year and how
that time is spent; e.g., whether the individual is retired or is actively
involved in a business, and whether the individual travels and the reasons
for traveling, and where the individual spends time when not required to
be at a location for employment or business reasons, and the overall
pattern of residence of the individual;
(c) employment, including how the individual earns a living, the
location of the individual's place of employment, whether the individual
owns a business, extent of involvement in business or profession and
location of the business or professional office, and the proportion of in-
state to out-of-state business activities;

In the Matter of the Protest of Aurelia Shorty, page 11 of 21
(d) home or place of abode of the individual's spouse, children and
dependent parents, and where minor children attend school;
(e) location of domicile in prior years;
(f) ownership of real property other than residences;
(g) location of transactions with financial institutions, including the
individual's most active checking account and rental of safety deposit
boxes;
(h) place of community affiliations, such as club and professional
and social organization memberships;
(i) home address used for filing federal income tax returns;
(j) place where individual is registered to vote;
(k) state of driver's license or professional licenses;
(m) where items or possessions that the individual considers "near and
dear" to his or her heart are located, e.g., items of significant sentimental or
economic value (such as art), family heirlooms, collections or valuables, or pets.

Of the twelve listed domicile factors under Regulation §3.3.1.9(C)(4) NMAC

(4/29/2005), four factors clearly support the Taxpayer’s position, four factors clearly support the

Department’s position, one factor is arguably of equal weight to both parties, and two other

factors are not applicable (one factor, the location of domicile in previous years, is a circular

consideration under this fact pattern, as the same questions with respect to TY05 are also present

in previous years).

The two factors not particularly applicable to this analysis are (f), the ownership of real

property other than the residence, and (d) the home of spouse, children, or dependant parents.

The Taxpayer acknowledged that other than her home site lease on the Navajo Nation and her

rental property in Gallup, she owned or rented no other property. Additionally, there is no

evidence that the Taxpayer has a spouse or any children, and the Taxpayer acknowledged that

both of her parents have passed on.

The factor with evidence supporting both Taxpayer and the Department is factor (a),

homes or place abode owned or rented by the individual, their location, size and value, and how

used by the individual. On the one hand, it is clear that the Taxpayer’s home lease site on the

In the Matter of the Protest of Aurelia Shorty, page 12 of 21
Navajo Nation is the only property that the Taxpayer owns. It is also the property that she intends

to return upon retirement. On the other hand, it is clear that in TY05, the Taxpayer was living

primarily in her rental property in Gallup, NM. Given the state of the buildings on her home

lease site on the Navajo Nation, the evidence established that in TY05 the Taxpayer’s rental

property in Gallup was larger and in a better livable condition at that time. In fact, based on the

testimony of the Taxpayer, it does not sound like the Taxpayer was even in a position to live on

her home lease site on the Navajo Nation in TY05 without first undertaking substantial and time-

consuming rebuilding of the vandalized structures on that property.

The four factors supporting the Taxpayer are her employment status as a teacher on the

Navajo Nation, her community affiliation with the Kinlichee Chapter of the Navajo Nation, her

exclusive voter registration on the Navajo Nation, and the possession of materials of sentimental

value at the Hogan on her home lease site on the Navajo Nation. It is clear from the evidence

that the Taxpayer’s maintains her connections with her home community on the Navajo Nation,

where she returns frequently for ceremonial and familial purposes (though when she does return

for these purposes, she apparently stays with family near Kinlichee rather than at her home lease

site). The Taxpayer also is a dedicated teacher for the Navajo Nation, which further shows a

commitment to her Navajo community. Although the Department attempted to minimize the

importance of the Taxpayer’ s cultural connections during closing arguments, the Taxpayer’s

cultural connections with her native traditions are one factor that do support the Taxpayer’s

position.

Four factors support the Department’s position. First, under factor (b), the Taxpayer

spent most of her time in TY05 in Gallup, NM rather than at her home site on the Navajo Nation.

The evidence supported that the Taxpayer paid for utilities including water, telephone, and cable

In the Matter of the Protest of Aurelia Shorty, page 13 of 21
in Gallup during TY05 while not paying for any utilities on her home lease site on the Navajo

Nation. The Taxpayer repeatedly emphasized that she only rented a place in Gallup because of

the convenience of available housing in Gallup as opposed to the Mariano Lakes area and

because of the convenience of commuting from Gallup to her work rather than the substantially

greater distance from her home lease site to her work. If the Taxpayer benefits from the

conveniences provided in Gallup to the point that she choose to reside there over someplace on

the Navajo Nation during TY05, then there is nothing improper about the State requesting that

she pay the requisite personal income taxes that support the infrastructure necessary to provide

the conveniences that the Taxpayer values.

The next two factors supporting the Department’s position, factors (g) and (i), stem from

the Taxpayer’s own federal income tax filings in TY05. Under factor (g), the location of

Taxpayer’s financial institutions during TY05, the Taxpayer’s tax filings show that she banked

with Bank of America, listing her Gallup rental address. Under factor (i), the home address of

federal income tax filings, the Taxpayer filed her federal taxes for TY05 listing her address as her

rental address in Gallup. Rather than listing either her Navajo Nation home lease site or her

Navajo Nation P.O. Box address, Taxpayer voluntarily chose to use her Gallup rental address

when filing her Federal income tax returns in TY05. The location in Gallup where the Taxpayer

self-reported her address under penalty of perjury with the Federal government goes a long way

in determining where the Taxpayer believed she resided during TY05.

Finally, supporting the Department’s position is factor (k) given the Taxpayer’s driver’s

license in New Mexico and her registration of numerous vehicles in New Mexico. In fact, the

evidence is clear that the Taxpayer actually had her father’s former truck towed to New Mexico

from her home lease site in the Navajo Nation to Gallup, where she registered it here in New

In the Matter of the Protest of Aurelia Shorty, page 14 of 21
Mexico. Again, while it is understandable that the Taxpayer wanted to avoid the possibility of

vandalism at her home lease site by moving the truck (and all her vehicles) closer to her in

Gallup, there is a cost to the State of New Mexico for that convenience of more frequent police

patrols/presence that the Taxpayer benefits from in Gallup. New Mexico personal income tax is

designed to recoup the costs of providing those conveniences and services to those who primarily

benefit—residents of New Mexico.

In conclusion, even considering the domicile factors, the Taxpayer fails to overcome her

burden in light of the equal balancing of the factors between the Taxpayer and the Department.

Because the Taxpayer did not” live within” the geographic boundaries of the Navajo Nation in

TY05, because the Taxpayer was physically present in New Mexico for at least 185-days in

TY05, and because the Taxpayer otherwise failed to overcome the presumption of correctness of

the assessment using the domicile factors, the Taxpayer was not eligible for exemption of New

Mexico income tax in TY05 under NMSA 1978, §7-2-5.5 (1995). Consequently, the Taxpayer is

obligated to pay State income tax, penalty, and interest for TY05.

Assessment of Penalty.

In her closing argument, the Taxpayer asked that the penalty be waived because the

Taxpayer had no intent to defraud given that a reasonable person could conclude that she was

domiciled on the Navajo Nation during TY05. While the Taxpayer’s argument references fraud,

this case does not involve the imposition of civil penalty for fraud under NMSA Section 7-1-

69(D) (2003) nor does it involve any allegations of fraud under NMSA Section 7-1-72 or NMSA

Section 7-1-73 (2006).

In the Matter of the Protest of Aurelia Shorty, page 15 of 21
When a taxpayer fails to pay taxes due to the State as a result of negligence or disregard

of rules and regulations, but without intent to evade or defeat a tax, NMSA 1978 Section 7-1-69

(2003, prior to amendments through 2007) requires that

there shall be added to the amount assessed a penalty in an amount
equal to the greater of: (1) two percent per month or any fraction of
a month from the date the tax was due multiplied by the amount of
tax due but not paid, not to exceed ten percent of the tax due but
not paid. (italics added for emphasis)

The statute’s use of the word “shall” makes the imposition of penalty mandatory in all instances

where a taxpayer’s actions or inactions meets the legal definition of “negligence” even if a

taxpayer’s actions or inactions were unintentional.

Regulation §3.1.11.10 NMAC (1/15/01) defines negligence in three separate ways: (A)

“failure to exercise that degree of ordinary business care and prudence which reasonable taxpayers

would exercise under like circumstances;” (B) “inaction by taxpayer where action is required; or

(C) “inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or inattention.”

In this case, due to her erroneous belief that she qualified for the exemption under NMSA

1978, §7-2-5.5 (1995), Taxpayer did not file and pay the appropriate New Mexico personal

income tax for TY05 when due. While certainly not an intentional error or omission, erroneous

belief, inadvertent error or inattention meets the legal definition of “civil negligence” under the

penalty statute. See El Centro Villa Nursing Center v. Taxation and Revenue Department, 108

N.M. 795, 799, 779 P.2d 982, 986 (Ct. App. 1989). Taxpayer presented no evidence under

Regulation §3.1.11.11 NMAC (1/15/01) to demonstrate nonnegligence. As such, the Department

is legally required by statute to impose penalty.

In the Matter of the Protest of Aurelia Shorty, page 16 of 21
Computation of Penalty.

The Department imposed a civil penalty of 20% under NMSA 1978, § 7-1-69 (2008)

rather than under NMSA 1978 Section 7-1-69 (2003, prior to amendments through 2007), in

effect prior to January 1, 2008. Since the Taxpayer protested the imposition of any penalty, and

because the Taxpayer’s Bill of Rights requires that an assessment not be “incorrect, erroneous, or

illegal,” the accuracy of the computation of total penalty amount assessed is an issue for

consideration in this protest. NMSA 1978, Section 7-1-4.2 (2003). Even when a Taxpayer is liable

for civil negligence penalty, as in here, a Taxpayer is not required to pay a miscalculated or

incorrect amount of penalty. See id.

The question about which of the civil negligence penalty provisions is applicable to penalty

amounts resulting from unpaid tax liabilities predating the effective date of the amended penalty

provision is currently subject to numerous appeals before the Court of Appeals. Eventually, this

issue will become moot since either there will be no more of these cases because it has been three

years since the effective date of the amended penalty statute or because the Court of Appeals will

have had reached a decision on one of the appeals. But until such time as the Court of Appeals

makes a decision, the issue must still be analyzed for the record.

The only modification in the statute from NMSA 1978 Section 7-1-69 (2003, prior to

amendments through 2007), in effect prior to January 1, 2008, versus NMSA 1978, § 7-1-69

(2008), effective January 1, 2008, is an increase of maximum possible penalty not exceed amount

of 20% from the previous 10% maximum limit. Under both the previous version and the amended

version of the penalty provision, the Department was to apply two percent per month penalty

from the time the tax was due and not paid until the penalty reached its statutorily prescribed “not

to exceed” limit of either 10% under the previous version (which effectively means a five-month

In the Matter of the Protest of Aurelia Shorty, page 17 of 21
period of time from the time the tax was due but not paid) or 20% under the amended version

(which effectively means a ten-month period of time from the time the tax was due but not paid).

Under both the previous and amended versions of the penalty provision, although factually a tax

principal may remain due and not paid, the legislature prohibits the Department from imposing

any additional penalty beyond the “not to exceed” limit.

The question of dispute is whether the Department is impermissibly retroactively

applying the amended penalty provision to increase a previously reached “not to exceed” limit of

10% by an additional 10% under the amended penalty provision without clear legislative intent

allowing it to do so. As the New Mexico Court of Appeals recently indicated, “a statute or

regulation is considered retroactive if it…affixes new disabilities to past transactions.” Wood v.

State Educ. Ret. Bd., 2010 N.M. App. LEXIS 134 (N.M. Ct. App. Nov. 10, 2010), citing Coleman

v. United Eng'rs & Constructors, Inc., 118 N.M. 47, 52, 878 P.2d 996, 1001 (1994), [bold for

emphasis].

In this case, the past transaction at issue is the Taxpayer’s failure to file and pay personal

income taxes for TY05 when due on April 15, 2006. Under the old penalty statute in effect at the

time of the Taxpayer’s failure to file and pay tax when due, the disability for this transaction

terminated at a 10% penalty in September 2006, five months after the personal income tax for

TY05 were due but not paid. After that date, under the old penalty statute, no further civil penalty

could be imposed even though the tax still remained due and unpaid after that date because the

penalty had reached its “not to exceed” limit. The amended penalty provision affixes a new

disability (an additional 10% of penalty) against a transaction that both predates the effective date

of the amended penalty provision and had already reached the former “not to exceed” statutory limit

for imposition of penalty. Consequently, since the amended penalty provision would affix a new

In the Matter of the Protest of Aurelia Shorty, page 18 of 21
disability against a past transaction, a transaction that had already reached its maximum disability

under the previous penalty provision, to apply the amended penalty provision in this situation

would be a retroactive application.

A statute may only be applied retroactively if there is a clear, unambiguous legislative intent

to do so. See Psomas v. Psomas, 99 N.M. 606, 609, 661 P.2d 884, 887 (1982). Absent such clear

intent for a retroactive application, a statute only applies prospectively. See id. The Department

has never presented any evidence, nor does the plain language of the statute contain any evidence,

that the legislature intended NMSA 1978 Section 7-1-69 (2007) to apply retroactively to

obligations that originated before the January 1, 2008 effective date of that revision. Given the

legislature’s silence on the question of retroactivity of NMSA 1978 Section 7-1-69 (2007), case

law suggests that the amended statute should only apply prospectively. See Psomas; See also

N.M. Elec. Serv. Co. v. Jones, 80 N.M. 791, 793, 461 P.2d 924, 926 (Ct. Appl. 1969) (“where an

ambiguity or doubt exists as to the meaning or applicability of a tax statute, it should be construed

most strongly against the taxing authority and in favor of those taxed”). Moreover, in a case

closely on point, the New Mexico Supreme Court has also found that the Department may not

retroactively apply a modified penalty regulation against a taxpayer for an obligation that predates

the effective date of the modified regulation. See Kewanee Industries, Inc. v. Reese, 114 N.M. 784,

845 P.2d 1238 (1993).

Nothing in the plain language of the amended penalty provision, NMSA 1978, Section 7-1-

69 (2008) indicates that the Department may re-open an exhausted penalty calculation once that

penalty has met its “not to exceed” condition. As mentioned before, without clear evidence of

legislative intent for retroactive application of NMSA 1978, Section 7-1-69 (2008), the outstanding

tax due for TY05 was subject to a penalty “not to exceed” 10% pursuant to NMSA 1978, Section 7-

In the Matter of the Protest of Aurelia Shorty, page 19 of 21
1-69 (2003) because that was the provision in effect at the time the tax was due and the “not to

exceed” condition had been met before the effective date of the amended penalty provision. See

Kewanee Industries, Inc.; See also Psomas; See also N.M. Elec. Serv. Co. While the Department

was required to impose civil penalty in this instance, that civil penalty should not exceed 10%

pursuant to NMSA 1978, Section 7-1-69 (2003). The assessment of penalty shall be reduced by

10%.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely, written protest of the Notice of Assessment for 2005

personal income taxes, penalty, and interest issued under Letter No. # L0089824640, and

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

2. Taxpayer failed to demonstrate that she lived within the boundaries of the Navajo

Nation in Tax Year 2005, as required in order to claim the applicable exemption under NMSA

1978, §7-2-5.5 (1995).

3. Since the exemption under NMSA 1978, §7-2-5.5 (1995) does not apply, the

Taxpayer is liable for personal income tax principal, interest, and penalty in tax year 2005.

4. However, the amount of civil penalty added to the principal tax should not have

exceed ten percent as provided in §7-1-69(A)(1)(2003, prior to amendments through 2007) and any

amounts assessed in excess of the ten percent (10%) should be abated.

In the Matter of the Protest of Aurelia Shorty, page 20 of 21
For the foregoing reasons, the Taxpayer's protest IS GRANTED IN PART AND

DENIED IN PART: the Department is ordered to abate ten percent of the penalty amount for

tax year 2005 in the amount of $306.10.

DATED: August 17, 2011.

In the Matter of the Protest of Aurelia Shorty, page 21 of 21