Was Bonnie Yearley's Navajo Nation income exempt while she lived with and cared for her father on the reservation but remained domiciled in Gallup?
Apply this to your situation
This page answers the general question as of 2011. Ezel answers yours, under current New Mexico tax law, with citations.
Plain-English summary
Bonnie Yearley's 1999-2004 income was exempt from New Mexico personal income tax because she was an enrolled Navajo Nation member who lived and earned the relevant income within the Nation's boundaries. She did not lose the exemption merely because her permanent domicile remained in Gallup and she intended to return there.
From 1999 through 2004, Yearley lived in her wheelchair-bound father's two-bedroom home in rural Teesto, Arizona, on the Navajo Nation. She slept on a twin bed in the living room, prepared his meals, stayed overnight, and commuted from his home to work. Her husband remained at the couple's Gallup house because his job with the McKinley County Sheriff's Department required him to live within 50 miles of Gallup.
Yearley worked at the Pittsburgh and Midway Coal Mine on the Navajo Nation through December 2002. In 2003 and 2004, she received Chevron retirement income arising from that employment. The Department agreed that she was an enrolled member and that all the disputed income came from work performed within Navajo Nation boundaries.
“Lives within the boundaries” was not a domicile test
Section 7-2-5.5 exempted income when a member of a federally recognized New Mexico tribe earned it from work within the relevant tribal boundaries and the member lived within those boundaries. The statute did not use the terms “resident” or “domicile,” did not cross-reference New Mexico's domicile rules, and did not define the quoted phrase through intent-based factors.
The decision read the language geographically: “lives within the boundaries” meant a continuing physical presence within a defined area. That reading matched the federal cases' emphasis on tribal sovereignty and the reservation boundary as the dividing line between protected on-reservation income and generally taxable off-reservation activity.
The hearing officer also reasoned that a domicile requirement would undermine the exemption. A person generally needs an exemption from New Mexico income tax only after being treated as a New Mexico resident; if New Mexico domicile itself defeated Section 7-2-5.5, the exemption could not operate as intended.
Gallup ties showed domicile, not where Yearley was living
The Department proved that Yearley retained strong Gallup connections. Her husband and home were there; she kept a New Mexico driver's license, vehicle registrations, bank account, mail address, and voter registration; and she voted in Gallup. She never intended to make Teesto her permanent home and returned to Gallup in October 2004 after her brother took over their father's care.
Those facts established New Mexico domicile, but domicile was not the controlling statutory test. The hearing officer found Yearley and her husband credible about her actual presence in Teesto. Caring for an ailing parent also explained why she physically lived on the Navajo Nation without changing every formal tie to Gallup.
The exemption covered wages and related retirement income
The Department conceded that Yearley's 1999-2002 mine earnings came from work on the Navajo Nation. The decision also treated her 2003-2004 retirement income as qualifying income derived from that tribal-land employment under the cited regulation.
As of the hearing, the assessments showed $27,380.13 of principal tax, $24,578.84 of interest, and $5,867.80 of penalty. Because the assessment attributable to Yearley's income had to be abated, the alternative dispute over whether penalty should have been capped at 10% rather than 20% became moot.
Result: the protest was granted, and the Department was ordered to abate the assessment as it related to Bonnie Yearley's 1999-2004 income.
What this means for you
Tribal members temporarily living on tribal land
For the version of the statute applied here, keeping an off-reservation domicile did not automatically defeat the exemption. The decision focused on whether the member actually lived within the tribal boundaries while earning qualifying income there.
Families caring for relatives
Formal records may continue to point to a permanent home even when a person physically lives elsewhere for caregiving. The decision separated those domicile indicators from credible evidence of where Yearley actually stayed during the relevant years.
Retired tribal members
The order included retirement income derived from qualifying on-reservation employment, relying on the Department regulation cited in the decision. The source of the retirement benefit mattered.
Married taxpayers with mixed exemption status
The order abated the assessment only as it related to Yearley's income. It noted—but did not decide in detail—the community-property question created by her non-Navajo spouse's residence outside the Navajo Nation.
Common questions
Q: Did Yearley remain domiciled in New Mexico?
A: Yes. The decision found that her Gallup ties and intent to return established domicile there, but held that domicile was not the test used by Section 7-2-5.5.
Q: What showed that she lived on the Navajo Nation?
A: Credible testimony established that she slept at her father's Teesto home, cared for him there, and commuted from that home during 1999-2004.
Q: Why did her Gallup license, voting, banking, and mail not defeat the exemption?
A: Those facts showed her permanent domicile. The statute instead asked whether she lived within the tribal boundaries while earning qualifying income there.
Q: Did the exemption include her retirement income?
A: Yes. The Department agreed that the 2003-2004 retirement income stemmed from her prior Navajo Nation employment, and the cited regulation treated it as qualifying.
Q: Was the entire couple's income declared exempt?
A: No. The order directed abatement only for the assessment attributable to Bonnie Yearley's income; her husband had already paid New Mexico tax on his own income.
Citations and references
Statutes and regulations:
- NMSA 1978, § 7-2-5.5 (1995) — exemption for qualifying tribal members living and earning income within tribal boundaries
- NMSA 1978, § 7-2-3 (1981) — income tax imposed on New Mexico residents unless exempt
- NMSA 1978, § 7-1-17(C) (2007) — presumption that assessments are correct
- NMSA 1978, § 7-2-2(S) (2003) and Regulation 3.3.1.7 NMAC — residence and domicile rules that the decision distinguished
- Regulation 3.3.4.12 NMAC — tribal-income exemption and qualifying retirement income
Cases cited:
- McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1972)
- Oklahoma Tax Commission v. Sac & Fox Nation, 508 U.S. 114 (1993)
- Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450 (1995)
- Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95 (2005)
- Dillard v. New Mexico State Tax Commission, 53 N.M. 12 (1948)
Source
- Listing: New Mexico Decisions & Orders
- Decision post: John & Bonnie Yearley
- Decision PDF: D&O 11-29
Original ruling text
BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO
IN THE MATTER OF THE PROTEST OF
JOHN AND BONNIE YEARLEY No. 11-29
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L0242017536, L1555588352, L1081402624,
L0702604544, L0112911616, L1945068800
DECISION AND ORDER
A hearing was held on the above captioned matter on October 7, 2011 before Brian
VanDenzen Esq., Hearing Officer, in Santa Fe. Mr. John and Bonnie Yearley (“Taxpayers”)
appeared, represented by attorney R. Tracy Sprouls. The Taxation and Revenue Department of
the State of New Mexico (“Department”) was represented by Department Staff Attorney Peter
Breen. 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, Department C and G are admitted into the record. Based on the evidence and arguments
presented, IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT
- Taxpayers were (and remain) married during the relevant period of time at issue in
this protest, tax years 1999 through 2004.
-
Bonnie Yearley is an enrolled tribal member of the Navajo Nation.
-
Mrs. Yearley is a member of the Teesto Chapter in Arizona.
-
Teesto Chapter is about 45-minutes away from Winslow, Arizona.
- Mrs. Yearley earned her income in tax years 1999 through 2002 while working at
the Pittsburgh and Midway Coal Mine near Window Rock, on the Navajo Nation.
- Mrs. Yearley retired from Pittsburgh and Midway Coal Mine on December 31,
2002.
- In tax years 2003 and 2004, Mrs. Yearley received retirement income from
Chevron from her previous work at Pittsburgh and Midway Coal Mine.
- Before tax year 1999, and after tax year 2004, Taxpayers lived together in a
residential home at 408 Zecca Drive, Gallup, New Mexico.
- Beginning in 1999 and continuing through 2004, Mrs. Yearley lived on the
Navajo Nation so that she could care for her ailing father, who was wheelchair bound as a result
of polio.
- Mrs. Yearley’s father home was a two-bedroom home in a rural isolated area of
Teesto. Her father lived in one room while the other room was her father’s silversmith station.
- Between tax years 1999-2004, Mrs. Yearley lived in her father’s living room on a
twin bed.
- While living at her father’s home, Mrs. Yearley took care of her father by
preparing meals for her father, staying the night, and commuting back and forth to work from her
father’s house.
- Mrs. Yearley had no intention to remain in Teesto, which had significant alcohol,
drug, and delinquency problems. Mrs. Yearley always intended to return to Gallup and her
family after caring for her ailing father.
- During tax years 1999 through 2004, Mr. James Yearley remained living at the
Taxpayers’ residential home located at 408 Zecca Drive, Gallup, New Mexico.
In the Matter of the Protest of John and Bonnie Yearley, page 2 of 17
- Moving to Teesto with his wife was not a plausible option for Mr. Yearley
because his employment as Chief of Investigations with the McKinley County Sheriff’s
Department required him to live within 50-miles of Gallup.
- On weekends, Mr. Yearley would go to Teesto to see his wife and bring her
supplies like water, coal, and wood.
- Because Mrs. Yearley’s workplace at the mine in Winslow, Arizona was closer to
Gallup than Teesto, Mr. Yearley made a point of meeting Mrs. Yearley for lunch at least a couple
of times a week to see each other and exchange mail.
- When Mrs. Yearley first moved to Teesto to assist her ailing, wheelchair-bound
father in 1999, Mr. Yearley believed that Mrs. Yearley’s father might succumb within a year.
However, Mrs. Yearley’s father lived until 2006.
- During tax years 1999 through 2004, Mrs. Yearley continued to receive her mail
at her Gallup address. Mr. Yearley would bring her mail when he would visit her on the Navajo
Nation or when they would meet for lunch near her workplace. It was easier for Mrs. Yearley to
receive her mail in such a manner than in Teesto because mail service at her father’s address
required her to drive to Winslow, Arizona, a greater distance than to her workplace where she
could meet Mr. Yearley for lunch to receive her mail or to Taxpayers’ Gallup residential home.
- During tax years 1999 through 2004, Mrs. Yearley maintained her New Mexico
driver’s license with her Gallup address rather than switching to an Arizona driver’s license with
her Navajo Nation address.
- During tax years 1999 through 2004, Mrs. Yearley left her vehicles registered in
New Mexico using her Gallup address.
In the Matter of the Protest of John and Bonnie Yearley, page 3 of 17
- During tax years 1999 through 2004, Mrs. Yearley maintained her checking
account at a bank in Gallup with her Gallup address. Mrs. Yearley did not switch her bank
accounts because Mr. Yearley was responsible for paying the bills from their home in Gallup,
where Taxpayers received their bills.
- During tax years 2002 through 2004, Mrs. Yearley received retirement income
statements from Chevron at her Gallup residential address. Mrs. Yearley actually received her
income through direct deposit into her account at either Merchant’s Bank in Gallup or Bank of
America.
- During tax years 1999 through 2004, Mrs. Yearley maintained her voter’s
registration in Gallup, New Mexico. Mrs. Yearley voted in the 2000 presidential primary and
general elections in Gallup, New Mexico. In 2002, Mrs. Yearley voted in person for the general
election in Gallup. In 2004, Mrs. Yearley voted in person for the presidential general election in
Gallup.
- Sometime in 2004, Mrs. Yearley’s brother was released from prison and returned
to Teesto to assist in care for Mrs. Yearley’s father.
- In October 2004, Mrs. Yearley left her father in her brother’s care in Teesto and
returned to her home in Gallup. Mrs. Yearley has remained a full-time resident of Gallup ever
since.
- On September 18, 2006, the Department assessed John R. Yearley for Mrs.
Yearley’s unpaid tax personal income tax, penalty, and interest for tax years 1999 through 2004.
Mr. Yearley did pay New Mexico income taxes on all of his income.
- Although the dates listed on the assessments are July 11, 2006, the assessments
were not actually mailed out to Taxpayers until September 18, 2006.
In the Matter of the Protest of John and Bonnie Yearley, page 4 of 17
-
On October 9, 2006, Taxpayers filed a written protest to the assessments.
-
The Department initially did not acknowledge the protest because the Department
did not believe that the protest letter was timely. However, on December 9, 2009, the
Department reviewed a copy of the post-marked envelope that contained the assessments, which
indicated that the assessments were not mailed until September 18, 2006. Additionally, a review
of the Gentax computer database revealed that the assessments were actually printed on
September 5, 2006 not on the July 11, 2006 printed date on the assessments.
- On December 2, 2009, the Department acknowledged receipt of Taxpayers’
protest.
-
On November 16, 2010, the Department requested a hearing.
-
On November 24, 2010, the Hearing Bureau sent notice of administrative hearing,
scheduling the hearing for April 21, 2011.
- On April 19, 2011, Taxpayers’ counsel Mr. Sprouls entered his appearance and
moved for a continuance.
- On April 20, 2011, the Hearing Bureau granted the request for continuance and
vacated the scheduled hearing.
- On June 1, 2011, the Hearing Bureau sent new notice of administrative hearing,
scheduling the hearing for October 7, 2011.
- As of the date of hearing, the Department indicated that under the assessments,
Taxpayers owed $27,380.13 in principal personal income tax, $24,578.84 in interest, and
$5,867.80 in penalty. The Department calculated penalty to a maximum limit of 20%.
In the Matter of the Protest of John and Bonnie Yearley, page 5 of 17
DISCUSSION
The question in this case is whether Mrs. Bonnie Yearley’s personal income for tax years
1999-2004 was exempt from New Mexico Personal Income tax pursuant to NMSA 1978, §7-2-
5.5 (1995). Taxpayers and the Department are in agreement that Mrs. Yearley was an enrolled
member of the Navajo Nation during the relevant period of time, and earned all of her personal
income either from working on the Navajo Nation at the mine in Window Rock or from
retirement income stemming from that employment on the Navajo Nation. The major dispute
between Taxpayers and the Department is whether under NMSA 1978, §7-2-5.5 (1995), Mrs.
Yearley “lived within the boundaries” of the Navajo Nation in tax years 1999-2004. Taxpayers
also argue in the alternative that if Mrs. Yearley’s income is not subject to exemption, the
assessment of penalty must be capped at 10% rather than the 20% penalty the Department
assessed in this case.
Presumption of Correctness and Burden of Proof.
Under NMSA 1978, Section 7-1-17(C) (2007), the assessments issued in this case are
presumed to be correct. Consequently, Taxpayers have the burden to overcome the assessments
and establish that they are not required to pay the assessments. See Archuleta v. O'Cheskey, 84
N.M. 428, 431, 504 P.2d 638, 641 (NM Ct. App. 1972).
However, once a taxpayer rebuts the presumption of correctness, the burden shifts to the
Department to show the correctness of the assessed tax. See MPC Ltd. v. N.M. Taxation & Revenue
Dep't, 133 N.M. 217, 220, 2003 NMCA 21, ¶13, 62 P.3d 308, 311 (N.M. Ct. App. 2002).
In the Matter of the Protest of John and Bonnie Yearley, page 6 of 17
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,
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 Taxpayers can demonstrate that Mrs. Yearley was entitled to the exemption under NMSA
1978, §7-2-5.5 (1995) during the relevant time, then the portion of Taxpayers income attributable
to Mrs. Yearley’s earnings in tax years 1999-2004 would not be subject to New Mexico personal
income tax.
Federal Origins of the Exemption.
Before breaking down the exemption under NMSA 1978, §7-2-5.5 (1995) further, it is
necessary to discuss the clear federal underpinnings necessitating that State exemption. The
seminal federal case on the prohibition of state personal income taxes imposed on tribal members
living on tribal lands from income derived from within tribal territory is the United States
Supreme Court case, McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1972). In
In the Matter of the Protest of John and Bonnie Yearley, page 7 of 17
McClanahan, the State of Arizona attempted to impose an income tax on an enrolled member of
the Navajo Nation living on the portion of that reservation within the State of Arizona. See id. at
165-166. The taxpayer at issue in McClanahan conceded that for purposes of Arizona law, she
was a resident of Arizona. See id. at 166, footnote 3. However, the fact that the McClanahan
taxpayer legally qualified as a resident of Arizona played no role in the Supreme Court’s analysis
of the issue or in the Supreme Court’s ultimate holding.
Three other factors were of greater importance to the Supreme Court in McClanahan.
First, the Supreme Court determined that Indian Sovereignty Doctrine—that is that Native
peoples have the power to self-regulate their own affairs on native lands—provided a relevant
policy background against which the treaties and relevant statutes must be read. See id. at 172.
Second, the Supreme Court considered the express terms of the United States and Navajo Nation
treaty (which is the same treaty involved in this protest) and found that the treaty precluded the
extension of state tax law to “Indians on the Navajo Reservation.” id. at 175. Finally, the
Supreme Court considered the Arizona Enabling Act (which the Supreme Court noted in
footnote 14 matched New Mexico’s enabling act) and found that under the Enabling Act,
Arizona was both precluded from asserting claims to lands within the Navajo Nation and
prohibited from taxing any lands within the Navajo Nation. See id. at 175-176. Against this
backdrop, even if the tribal member was also a resident of Arizona like conceded in the case, the
Supreme Court ultimately held that Arizona could not impose a state personal income tax on a
tribal member living on tribal land whose income “derived wholly from reservation resources.”
id. at 179.
Subsequent United States Supreme Court cases have affirmed and expanded on the
rationale of the McClanahan holding. In the case Oklahoma Tax Comm'n v. Sac & Fox Nation,
In the Matter of the Protest of John and Bonnie Yearley, page 8 of 17
508 U.S. 114 (U.S. 1993), the United States Supreme Court emphasized that the McClanahan
holding “relied heavily on the doctrine of tribal sovereignty.” id. at 123. Because of this concept
of tribal sovereignty expressed in McClanahan, the Supreme Court in Oklahoma Tax Comm'n v.
Sac & Fox Nation found that there is a presumption against taxability for Native American
“living and working” on tribal lands. id. at 124.
Although the term “residence” was mentioned at least twice in Oklahoma Tax Comm'n v.
Sac & Fox Nation, given the tribal Sovereignty Doctrine underlying its analysis, the Supreme
Court’s focus was much more on the physical location of the tribal member vis-à-vis tribal lands
than any analysis of domicile or that tribal member’s intent. In fact, the Supreme Court stated in
Oklahoma Tax Comm'n v. Sac & Fox Nation that to be exempt from State income tax, it is
enough that the tribal “member live in ‘Indian Country’.” id. at 123. Further, the Supreme Court
explained that “Indian sovereignty serves as a ‘backdrop’ only for those tribal members who live
on the reservation, and all others fall outside of McClanahan’s presumption against taxation.”
id. at 124 (bold added for emphasis). It is not a surprise then, based on this final point noted in
Oklahoma Tax Comm'n v. Sac & Fox Nation, that the Supreme Court allowed State taxation of
tribal members not living within tribal lands. See Okla. Tax Comm'n v. Chickasaw Nation, 515
U.S. 450, 462-463 (U.S. 1995).
More recently, in Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 112 (U.S.
2005), the United States Supreme Court again affirmed the McClanahan presumption against
taxation for tribal members living on tribal lands. Importantly in Wagnon, the Supreme Court
stated that in its “unique Indian tax immunity jurisprudence”, the concept of tribal sovereignty
“has a significant geographical component.” id. This significant geographical component of
tribal sovereignty provides the “backdrop” in which the relevant treaties and statutes must be
In the Matter of the Protest of John and Bonnie Yearley, page 9 of 17
analyzed in order to assess a State’s attempt at taxation of tribal members. id. In the discussion
in Wagnon, the geographical component appears to be the decisive operational distinction for the
Supreme Court: while Native Americans living within a reservation are generally protected by
the McClanahan presumption against taxation, Native Americans “going beyond reservation
boundaries” are generally subject to State tax. id. at 112-113.
The Statutory Exemption.
Against this historical background, New Mexico codified the exemption for income tax
under NMSA 1978, §7-2-5.5 (1995) cited above. The statute cannot be interpreted to conflict
with federal constitutional law, as discussed in the above-cited cases. That 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. By regulation, the Department requires that the income derive “from… activities on the
tribal territories”. See 3.3.4.12(C) NMAC (5/15/2001). The Department conceded that Mrs.
Yearley earned all of her income in tax years 1999-2004 from work performed within the
boundaries of the Navajo Nation.1
The third element under NMSA 1978, §7-2-5.5 (1995) presents the main 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
In the Matter of the Protest of John and Bonnie Yearley, page 10 of 17
statute provide a definition, standard, or test to determine what is meant to “live within the
boundaries” of tribal land.
Taxpayers argue that this third element does not depend on a residency or domicile
analysis because the legislature did not specify those terms in the plain language of the statute.
Taxpayers argue that the legislature was presumed to know of the legal significance of the words
“residency” and “domicile”, yet choose not to use those words under the statute because the
legislature intended a different standard under the exemption statute. Instead, Taxpayers argue
that under the plain language of NMSA 1978, §7-2-5.5 (1995), even if Mrs. Yearley remained
domiciled in Gallup from tax years 1999-2004, she still qualified for the exemption because she
was physically “living within the boundaries” of the Navajo Nation during that time period.
The Department counters that although the legislature did not use the words “residency”
or “domicile” in the statute because it was simply the terms of art under the McClanahan
holding, the statute nevertheless requires a determination of “residency” and/or “domicile.” In
other words, the Department argues that since Mrs. Yearley remained a New Mexico resident
domiciled in Gallup during the relevant tax periods, even if she was physically present and
residing in Teesto, Arizona on the Navajo Nation, she did not qualify for the exemption. The
Department argued that to find that either “residency” or “domicile” was not the necessary
analysis under the exemption would do harm to both election law and tax law. The Department
did not expand on this final point.
Statutory Construction of the Exemption.
Any question of statutory construction must begin with a plain meaning reading of the
statute. See Wood v. State Educ. Ret. Bd., 2011-NMCA-20, ¶12, 250 P.3d 881, 884 (N.M. Ct.
1
This included her retirement income in 2003-2004, as required under Regulation 3.3.4.12(A) NMAC (5/15/2001).
In the Matter of the Protest of John and Bonnie Yearley, page 11 of 17
App. 2010), cert denied Sup. Ct. No. 32,792. Extra words should not be read into a statute if the
statute is plain on its face, especially if it makes sense as written. See Johnson v. N.M. Oil
Conservation Comm'n, 1999 NMSC 21, ¶ 27, 127 N.M. 120, 126, 978 P.2d 327, 333 (NM 1999).
Only if the plain language interpretation would lead to an absurd result not in accord with the
legislative intent and purpose is it necessary to look beyond the plain meaning of the statute. See
Bishop v. Evangelical Good Samaritan Soc'y, 146 N.M. 473, 477, 212 P.3d 361, 365 (N.M.
2009).
Although the entire exemption is cited above, the portion of NMSA 1978, §7-2-5.5
(1995) subject to interpretative dispute is worth restating here: whether the tribal member
“…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…”
Considering this plain meaning requirement, a close reading of the exemption does not
support the Department’s contention that a domicile analysis is the appropriate method of
analysis to determine whether a taxpayer “lived within the boundaries.” The words “residency”
and/or “domicile” are not used in the exemption statute. Despite the fact that the legislature was
aware of the meaning of “residency” and “domicile” given it gave those words legal significance
under a separate statute, NMSA 1978, § 7-2-2 (S) (2003), the legislature choose to use the
distinct phrase “lives within the boundaries” under the exemption, NMSA 1978, §7-2-5.5 (1995).
Moreover, the exemption statue NMSA 1978, § 7-2-5.5 (1995) does not cross 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). The Department’s own accompanying regulation
under the exemption statute, Regulation 3.3.4.12 NMAC (5/15/01), neither defines “lives within
In the Matter of the Protest of John and Bonnie Yearley, page 12 of 17
the boundaries” as equivalent to “residency” and/or “domicile,” nor references the words
“residency” or “domicile” in any manner.
Unlike “domicile”, which deals a great deal with a person’s intent, the term “lives within
the boundaries” used in the exemption is much more literal phrase related to a person’s
geographical location. “Lives within the boundaries” suggests a continuing physical presence
inside a defined geographical space. This more literal reading of “lives within the boundaries”
under the exemption statute is consistent with the legislative purpose in codifying the federal
case law addressed by McClanahan and its progeny, which placed a strong emphasis on the
geographical component of tribal sovereignty and the Indian income tax exemption. In light of
this geographical component in the federal case law, it is logical that the legislature would give
greater priority to the geographical location of a person within Native American land rather than
that person’s intent and the other factors that are part of a classic domicile analysis.
There is also a very basic point that further supports this plain language meaning
interpretation: any claimed exemption to New Mexico personal income tax presumes first that
the person claiming the exemption is a resident of New Mexico. In other words, to even have to
claim an exemption to New Mexico income tax, one must first be a resident of New Mexico
subject to income tax. If, as the Department claims, that the exemption at issue cannot apply
when the person claiming the exemption is a resident of New Mexico, than the exemption would
never apply because one must first be a New Mexico resident to even have a need to claim an
exemption from paying New Mexico income tax. In other words, if New Mexico residency was
fatal to the claim of exemption under NMSA 1978, § 7-2-5.5 (1995), the exemption itself would
become superfluous because no resident of New Mexico could ever claim it. Like in
McClanahan, where the taxpayer was granted an exemption from income tax despite otherwise
In the Matter of the Protest of John and Bonnie Yearley, page 13 of 17
being a resident of the state, the fact that a taxpayer claiming the exemption in New Mexico is
also a New Mexico resident does not fundamentally alter the analysis and application of the
exemption.
In light of the plain language reading of the exemption and the federal case law
addressing the issue of taxability of native peoples on native lands, domicile does not appear to
be a relevant consideration under the exemption at issue in this protest.
Application of Exemption to the Facts at Protest.
In this case, Mrs. Yearley was particularly credible in her testimony that she lived with
her father on the Navajo Nation in order to care for him once he became wheelchair bound
between tax years 1999 and 2004. It is not uncommon for an adult child to move in and assist an
ailing parent at the parent’s home, increasing the plausibility of Mrs. Yearley’s testimony. Mrs.
Yearley’s testimony about caring for her ailing father was genuine. Mr. Yearley’s testimony also
bolstered Mrs. Yearley’s claimed presence at her father’s home during the relevant period of
time. Raising a subject that touches on a deeply personal concern not often broached openly in
public, Mr. Yearley acknowledged that Mrs. Yearley’s moving to the Navajo Nation to assist her
father made for a difficult time in their relationship. Rather than some wrought testimony
designed to check off legal boxes, the expression of this human sentiment gave Mr. Yearley’s
testimony depth that lends it credibility. Additionally, while not dispositive of a credibility
determination, given Mr. Yearley’s profession, he is undoubtedly aware of the potential career
and criminal consequences of participating in fraud, which claiming that Mrs. Yearley lived in
Teesto if in fact she still lived in Gallup between tax years 1999 and 2004 would constitute.
Common sense suggests that a person leaving to care for an elder rarely permanently
abandons their home and established community. In fact, one would suspect that more often than
In the Matter of the Protest of John and Bonnie Yearley, page 14 of 17
not, that person retains most of their possessions, their formal legal connections like licenses,
registrations, insurance, and bank accounts, and their more personal connections in their home
community. And Mr. Yearley’s point that members of the Navajo Nation in general place a
different weight on the importance/formalities of the Arizona-New Mexico border is well taken
in explaining why Mrs. Yearley did not make much of an effort to change the formal indicators
of her domicile from New Mexico to Arizona. Indeed, Mrs. Yearley herself acknowledged that
she had no intent or desire to make Teesto her permanent home and that she planned to return to
Gallup as soon as she was done caring for her father.
Consequently, it is of little surprise that the Department presented a great deal of evidence
showing that Mrs. Yearley remained connected to Gallup throughout tax years 1999 through
2004, especially because Mr. Yearley in fact remained in Gallup throughout that period of time.
Indeed, the Department clearly and overwhelmingly demonstrated that under a domicile analysis
pursuant to regulation 3.3.1.7 NMAC (4/29/2005), Mrs. Yearley remained domiciled in Gallup
even if she was physically present in Teesto on the Navajo Nation during the relevant period of
time. As a domiciliary of New Mexico, Mrs. Yearley is statutorily defined as a legal resident of
New Mexico even if she was not physically present and residing in this State for more than 185-
days. See NMSA 1978, § 7-2-2 (S) (2003).
If domicile and residency were the controlling standard under NMSA 1978, §7-2-5.5
(1995), the assessment in this protest would be appropriate. But like in McClanahan—where the
evidence established that the tribal member was also a resident of Arizona but was nevertheless
exempt from paying state income taxes from income earned while living on tribal lands—Mrs.
Yearley even as a domiciliary of New Mexico was nevertheless exempt from state income taxes
In the Matter of the Protest of John and Bonnie Yearley, page 15 of 17
because she earned her income on the Navajo Nation and lived within the boundaries of the
Navajo Nation with her father during the relevant tax periods.
One final thing to discuss is an issue that neither party raised either through presentation
of evidence or in argument. Although no clear finding can be made, it appears that Taxpayers
filed their personal income taxes with Mr. Yearley as head of household based on the fact that
the assessments list Mr. Yearley by name. The unresolved issue is—in a community property
state like New Mexico—whether the fact that Mr. Yearley is a non-native and resided outside of
the Navajo Nation during the relevant time period somehow invalidated Mrs. Yearley’s claim to
the exemption. This issue appears to be addressed in Dillard v. New Mexico State Tax Comm'n,
53 N.M. 12, 18 (N.M. 1948), where the New Mexico Supreme Court found that the assessor of
taxes had a duty when an exemption applied to one spouse’s interest in the community to
segregate out the other spouse’s undivided interest.
In sum, because Mrs. Yearley “lived within the boundaries” of the Navajo Nation during
the relevant tax periods, the portion of Taxpayers’ income attributable to her during tax years
1999-2004 is exempt from New Mexico personal income tax under NMSA 1978, §7-2-5.5
(1995) and McClanahan. The protest is granted, and the assessment should be abated
accordingly. Though Taxpayers’ argument about penalty would likely be compelling in light of
the numerous Decisions and Orders issued by the Hearing Bureau over the past year, since the
assessment must be abated, penalty is no longer an issue that needs to be addressed in this
protest.
In the Matter of the Protest of John and Bonnie Yearley, page 16 of 17
CONCLUSIONS OF LAW
- Taxpayers filed a timely, written protest of the Notices of Assessments for tax years
1999 through 2004 personal income taxes, penalty, and interest, and jurisdiction lies over the
parties and the subject matter of this protest.
- Taxpayers demonstrated by the preponderance of the evidence that income
attributable to Mrs. Yearley during tax years 1999-2004 was exempted from income tax under
NMSA 1978, §7-2-5.5 (1995) because she was an enrolled member of the federally recognized
Navajo Nation, earned income from tribal resources while working on the Navajo Nation during
the relevant period of time, and she lived within the boundaries of the Navajo Nation during the
relevant period of time.
For the foregoing reasons, the Taxpayer's protest IS GRANTED. The Department is
ordered to abate the assessment as it relates to income attributable to Mrs. Yearley in tax years
1999-2004.
DATED: December 2, 2011.
BRIAN VANDENZEN
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 Department has the right to appeal this decision 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, this Decision and Order will become final.
In the Matter of the Protest of John and Bonnie Yearley, page 17 of 17
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