Was a Navajo Nation member's mine income exempt from New Mexico tax when he worked on Navajo land but the evidence did not prove he lived at his Iyanbito home?

Plain-English summary

Edward J. Clah did not prove that he lived within the Navajo Nation during 2004, 2005, and 2007 through 2010, so his McKinley Mine wages were not exempt from New Mexico personal income tax. The decision applied a physical-location test rather than making legal domicile controlling, but the evidence still favored residence in Gallup.

Clah was an enrolled Navajo Nation member and belonged to the Iyanbito Chapter. He and his wife, Melvina Murphy, owned:

• a 2,800-square-foot home on Navajo trust land near Iyanbito; and
• a 1,700-square-foot home in Gallup purchased in 1999.

Clah worked at the McKinley Mine on Navajo land through July 2005, left for off-reservation work through 2006, and returned to the mine in 2007. He claimed the tribal-income exemption for the years when he worked at the mine but not for 2006.

Murphy was also a Navajo member, but her income-tax liability was not disputed. She lived and worked in Gallup, paid New Mexico income tax, and was named on the assessments only because of possible enforcement against community property.

The exemption had three requirements

Section 7-2-5.5 exempted income when:

1. it was earned by a member of a federally recognized New Mexico tribe;
2. the work was performed within the relevant tribal lands; and
3. the member lived within those boundaries.

The first two points were undisputed. Clah was a Navajo member, and the McKinley Mine work occurred on Navajo land. The case turned on where he lived.

The decision traced the exemption to federal authorities beginning with McClanahan v. Arizona State Tax Commission. Those cases tied the presumption against state taxation to tribal sovereignty and a significant geographical component: the member must live and work in Indian country.

“Lives within” meant physical presence, not domicile alone

The Department urged a residency-and-domicile analysis. The hearing officer declined to make domicile determinative because Section 7-2-5.5 used the distinct phrase “lives within the boundaries” and did not cross-reference New Mexico's domicile law.

The decision read that language as requiring continuing physical presence inside the defined tribal territory. A person's intention, while relevant to domicile, could not replace proof of where the person actually lived.

Clah's testimony did not overcome the contrary records

Clah testified that he lived at the Iyanbito home with his son from Sunday through Friday, worked at the mine during the week, and visited his wife and daughters in Gallup on Saturdays.

Substantial documentary evidence pointed the other way:

• his wife and daughters lived at the Gallup home throughout the relevant period;
• his son attended school in Gallup and used the Gallup home as his physical and mailing address on a driver's-license application;
• Clah's tax returns for all six years used Gallup addresses;
• his voter registration, driver's license, and vehicle records used the Gallup home;
• he voted using the Gallup registration in 2004 and 2008 despite testifying that he never voted; and
• the Gallup home was closer to the McKinley Mine than the Iyanbito home.

There was also evidence that other families occupied the Iyanbito property. Julia Gabehart was living there when the Department investigator visited in 2012, reported renting it for about two years, and had used that address on a 2010 driver's-license application. Terri Tom reported renting the home from 2003 through 2008, although the decision gave her statement limited weight because her sister had been involved in contentious foreclosure litigation with Clah.

The hearing officer did not find that any single record conclusively decided the issue. Taken together, however, the evidence made Gallup residence more likely than Iyanbito residence and exposed inconsistencies in Clah's statements about voting, his family's location, and whether he had rented the tribal home.

The alternative domicile analysis also did not help

Although domicile was not controlling, the decision reviewed the Department's twelve factors. Four favored Iyanbito, including the larger home, Clah's account of his time, his tribal employment, and Navajo community ties. Four favored Gallup, including the family's home, tax-return addresses, voter registration, and licenses. Four lacked usable evidence or were not separately determinative.

That even balance did not satisfy Clah's burden to overcome the assessment presumption and clearly establish an exemption.

Penalty and interest remained due

Clah did not file and pay the disputed income tax when due. The decision treated that inaction as negligence under Section 7-1-69 and Regulation 3.1.11.10. He offered no evidence establishing nonnegligence under Regulation 3.1.11.11.

Result: protest denied. For the six tax years, the decision upheld $30,522 tax, $6,104.40 penalty, and $5,629.03 interest as of the hearing. Interest continued to accrue until payment.

What this means for you

Tribal members claiming the Indian-lands income exemption

Proving tribal membership and an on-reservation job is not enough. Keep consistent evidence of where you physically live during each tax year.

Taxpayers maintaining two homes

Addresses used on tax returns, licenses, voter records, vehicle registrations, and family records can outweigh testimony about a different primary home. Rental records for the claimed home also matter.

Accountants and tax professionals

Treat “lives within” as a separate factual element from employment location and legal domicile. Reconcile every address and occupancy record before claiming the exemption.

Common questions

Q: Did the decision dispute Clah's Navajo membership?
A: No. His enrollment and Iyanbito Chapter membership were established.

Q: Was the McKinley Mine on Navajo land?
A: Yes. The Department did not dispute that his mine income came from work on the Navajo Nation.

Q: Did domicile control the exemption?
A: No. The hearing officer read “lives within the boundaries” as a geographical physical-presence requirement, though domicile evidence remained relevant to where Clah actually lived.

Q: Why did the exemption fail?
A: The records and rental evidence did not establish that Clah lived at the Iyanbito home and instead made Gallup residence more likely.

Q: Was Murphy's own income tax disputed?
A: No. The parties agreed that she had paid New Mexico tax and had no separate liability at issue.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-5.5 — exemption for qualifying tribal-member earnings on Indian lands
• NMSA 1978, § 7-2-3 — personal income tax on residents unless exempt
• NMSA 1978, § 7-2-2(S) and Regulation 3.3.1.9 NMAC — residency and domicile
• Regulation 3.3.4.12(C) NMAC — income from activities on tribal territories
• NMSA 1978, § 7-1-17(C) — presumption of assessment correctness
• NMSA 1978, § 7-1-69 and Regulations 3.1.11.10 and 3.1.11.11 NMAC — negligence penalty and nonnegligence

Federal cases:

• McClanahan v. Arizona State Tax Commission, 411 U.S. 164 (1972) — state income taxation of a tribal member living and earning income on reservation land
• Oklahoma Tax Commission v. Sac & Fox Nation, 508 U.S. 114 (1993) — presumption for tribal members living and working in Indian country
• Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450 (1995) — taxation outside tribal lands
• Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95 (2005) — geographical component of tribal tax immunity

New Mexico cases:

• Archuleta v. O'Cheskey, 84 N.M. 428, 431, 504 P.2d 638, 641 (Ct. App. 1972) — taxpayer's burden
• MPC Ltd. v. New Mexico Taxation & Revenue Department, 2003-NMCA-021, ¶ 13, 133 N.M. 217, 62 P.3d 308 — burden shifting after rebuttal
• Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct. App. 1991) — strict proof of an exemption

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Edward J. Clah & Melvina Murphy
• Decision PDF: D&O 12-19

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
EDWARD J. CLAH & MELVINA MURPHY No. 12-19
TO ASSESSMENT ISSUED UNDER LETTER
ID NOs. L2024160832, L1755725376, L0587583040,
L0050712128, L2097532480 and L0933084736

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on September 6, 2012 before

Brian VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Mr. Edward J. Clah (“Taxpayer”)

appeared represented by attorney Jeffery Loubet. Ms. Melvina Murphy appeared as a witness on

behalf of Taxpayer. Staff attorney Peter Breen represented the Taxation and Revenue

Department of the State of New Mexico (“Department”). Protest Auditor Milagros Bernardo and

retired Tax Fraud investigator Barry Wilson appeared as witnesses for the Department. Taxpayer

Exhibits #1-10 were admitted into the record. Department Exhibits A, B, C, C1, I, T, V, W, X,

AA, BB, CC, DD, EE, FF, and GG were admitted into the record. All exhibits are more

thoroughly described in the Administrative Exhibit Coversheet. Based on the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. The New Mexico personal income tax periods at issue in this protest are 2004,

2005, 2007, 2008, 2009, and 2010.

2. Taxpayer is an enrolled tribal member of the Navajo Nation.

3. Taxpayer is a member of the Iyanbito Chapter, about 20 miles east of Gallup,

New Mexico.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 1 of 24

4. Taxpayer is married to Melvina Murphy, also an enrolled member of the Navajo

Nation, Iyanbito Chapter. Although Melvina Murphy is listed by name in the assessments, both

parties conceded that Melvina Murphy’s tax obligations were not at issue in this protest. The

Department indicated it listed her name on the assessments simply for the possibility of

enforcing any favorable judgment against community property.

5. Taxpayer and Melvina Murphy have three children: Clinton Clah, Meloney Clah

(spelling uncertain), and Mikhala Clah.

6. Taxpayer and Melvina Murphy own a homesite lease with a home on Navajo

Nation tribal trust land near Iyanbito. The address of this property is 21 Dakota Loop, Iyanbito,

NM (herein referenced as “Iyanbito home”).

7. Taxpayer and Melvina Murphy purchased the Iyanbito home for approximately

$51,000 in 1993 as the result of a foreclosure action involving Vickie and Curtis Hand. The

parties contentiously litigated that matter over a period of years, at least through 1999 in the

District Court of the Navajo Nation. [Department Exhibit DD and Administrative Notice of

Opinion and Order of the District Court of the Navajo Nation]

8. The Iyanbito home is approximately 2,800 square feet with four bedrooms and

two-and-half baths.

9. On December 6, 1999, Taxpayer and Melvina Murphy purchased another home at

1940 Milda Ave. in Gallup, New Mexico (herein referenced as “Gallup home”) for $150,300.00.

[Department Exhibit I].

10. The Gallup home is approximately 1,700 square feet.

11. Because of her occupation as an on-call registered nurse at the hospital in Gallup,

Melvina Murphy resided at the Gallup home during the entire period at issue from 2004 through

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 2 of 24
2010. Mikhala Clah resided with her mother Melvina Murphy during the entire relevant period.

In tax years 2004 and 2005, Meloney Clah also resided with Melvina Murphy at the Gallup

home.

12. Because she resided in Gallup, and worked off tribal land in Gallup, Melvina

Murphy paid New Mexico personal income taxes in each relevant period.

13. Taxpayer was employed with Chevron Mining Inc. (formerly known as the

Pittsburgh & Midway Coal Co.) at the McKinley Mine from February 29, 1992 until July 30,

2005. [Taxpayer Exhibit #1].

2006. The McKinley Mine is located on the Navajo Nation, about 25-miles northwest of

Gallup and about 40-miles from Iyanbito. The commute to the McKinley Mine from Taxpayer’s

Gallup home address is about 25-minutes less than the commute from Taxpayer’s Iyanbito home.

15. Taxpayer left McKinley Mine for a different position of employment off of the

Navajo Nation from July 2005 through 2006. In 2007, Taxpayer was rehired for work with

Chevron Mining Inc. at the McKinley Mine on the Navajo Nation, where he continued working

through 2011.

16. Taxpayer claimed that he resided at the Iyanbito home with his son Clinton Clah

in tax year 2004, 2005, 2006, 2007, 2008, 2009, and 2010. Taxpayer claimed that he would live

at the Iyanbito home Sunday through Friday every week, attend work every day at the mine

during the week, and then get provisions and visit his wife and daughters on Saturday in Gallup.

17. Clinton Clah attended school in Gallup during the relevant period.

18. During the relevant period, Taxpayer maintained his mailing address at his Gallup

home.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 3 of 24

19. During the relevant period, Taxpayer was registered to vote at his Gallup home

address. [Department Exhibit B].

20. Although Taxpayer testified that he never voted, Taxpayer’s voter registration

information showed that in 2004, Taxpayer used his Gallup voter registration to absentee vote in

the general election and vote early in the 2008 general election. [Department Exhibit B].

21. In 2008, Taxpayer obtained a New Mexico driver’s license listing the Gallup

home as both his residential and mailing address. [Department Exhibit C1].

22. Taxpayer’s son Clinton Clah, whom Taxpayer claimed resided with him at the

Iyanbito home, also listed the Gallup home as both his residential and mailing address on his

2010 driver’s license application.

23. In 2003, Taxpayer registered a Ford vehicle with the State using his Gallup home

address as both his mailing and residential address. [Department Exhibit BB].

24. In 2009, Taxpayer registered a Chevrolet vehicle with the State using his Gallup

home address. Although there is a space on the title and registration form for a separate

“residence address if different then mailing address,” Taxpayer did not specify any address in

that space. [Department Exhibit CC].

25. In tax years 2004-2009, Taxpayer filed his Federal and State personal income

taxes as head of household, separately from his wife Melvina Murphy, as follows:

a. For tax year 2004, Taxpayer claimed Clinton Clah as a dependent and

used an address of PO Box 2651, Gallup, NM 87305. Taxpayer’s 2004 W2 listed

PO Box 2651, Gallup, NM 87305 as his address. [Taxpayer Exhibit #4].

b. For tax year 2005, Taxpayer claimed Clinton Clah as a dependent and

used an address of PO Box 2651, Gallup, NM 87305. Taxpayer had two W2’s in

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 4 of 24
2005, one listing PO Box 2651, Gallup, NM 87305 as his address with the other

listing his address at the Gallup home. [Taxpayer Exhibit #5].

c. For tax year 2006, Taxpayer claimed Clinton Clah as a dependent and

used an address of PMB 455 2418 E. HWY 66, Gallup, NM 87301. Taxpayer’s

2006 W2 listed his address at the Gallup home. [Taxpayer Exhibit #6].

d. For tax year 2007, Taxpayer claimed Clinton Clah as a dependent and

used an address of PMB 455 2418 E. Historic Hwy 66, Gallup, NM 87301.

Taxpayer had two W2’s in 2007, one listing PO Box 2651, Gallup, NM 87305 as

his address with the other listing his address at the Gallup home. [Taxpayer

Exhibit #7].

e. For tax year 2008, Taxpayer claimed Clinton Clah as a dependent and

used his Gallup home address. Taxpayer’s 2008 W2 listed his Gallup home

address. [Taxpayer Exhibit #8].

26. In tax years 2009-2010, Taxpayer filed his Federal and State personal income tax

returns jointly with his wife Melvina Murphy, as follows:

a. For tax year 2009, Taxpayer and Murphy claimed Clinton Clah and

Mikhala Clah as dependents and used Taxpayer’s Gallup home address.

Taxpayer’s 2009 W2 listed his Gallup home address as his address. [Taxpayer

Exhibit #9].

b. For tax year 2010, Taxpayer and Murphy claimed Clinton Clah and

Mikhala Clah as dependents and used Taxpayer’s Gallup home address.

Taxpayer’s 2010 W2 listed his Gallup home address as his address. [Taxpayer

Exhibit #10].

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 5 of 24

27. Taxpayer claimed an exemption for all income earned at the McKinley Mine on

the Navajo Nation land pursuant to NMSA 1978, Section 7-2-5.5 (1995) for New Mexico

personal income tax in tax years 2004, 2005, 2007, 2008, 2009, and 2010. Taxpayer did not

claim that exemption in 2006 and paid New Mexico personal income tax that year.

28. On November 28, 2011, the Department assessed Taxpayer for personal income

tax, penalty, and interest as follows:

a. Under letter id. no. L0933084736 for tax year ending 12/31/2004, $3,367

in personal income tax, $673.40 in penalty, and $1,952.13 in interest, for a then

total assessment of $5,992.53.

b. Under letter id. no. L2097532480 for tax year ending 12/31/2005, $3,575

in personal income tax, $715.00 in penalty, and $1,534.80 in interest, for a then

total assessment of $5,824.80.

c. Under letter id. no. L0050712128 for tax year ending 12/31/2007,

$1,463.00 in personal income tax, $292.60 in penalty, and $225.33 in interest, for

a then total assessment of $1,980.93.

d. Under letter id. no. L0587583040 for tax year ending 12/31/2008,

$4,731.00 in personal income tax, $946.20 in penalty, and $472.97 in interest, for

a then total assessment of $6,150.17.

e. Under letter id. no. L1755725376 for tax year ending 12/31/2009,

$8,535.00 in personal income tax, $1,707.00 in penalty, and $511.87 in interest,

for a then total assessment of $10,753.87.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 6 of 24
f. Under letter id. no. L2024160832 for tax year ending 12/31/2010,

$8,851.00 in personal income tax, $1,416.16 in penalty, and $198.60 in interest,

for a then total assessment of $10,465.76.

29. On November 28, 2011, Taxpayer contacted Mr. Barry Wilson, Investigator with

the Department’s Tax Fraud Investigations Division, about the issued assessments.

30. Mr. Wilson has over 40-years of experience as an auditor/investigator with the

IRS and with the Department.

31. During the November 28, 2011 conversation with Taxpayer, Mr. Wilson took

detailed notes. Taxpayer told Mr. Wilson that he, his wife, son, and daughter lived at the Iyanbito

home. Taxpayer further told Mr. Wilson that he had never rented the Iyanbito home.

[Department Exhibit DD].

32. On November 29, 2011, Taxpayer filed a protest of assessment of 2010 personal

income tax, penalty, and interest.

33. On December 8, 2011, Taxpayer filed a protest of assessments of 2004, 2005,

2007, 2008, and 2009 personal income taxes, penalty, and interest.

34. On December 9, 2011 and December 21, 2011, the Department acknowledged

receipt of Taxpayer’s respective protests.

35. The Department’s investigator Mr. Wilson visited Taxpayer’s Gallup home and

Iyanbito home in February of 2012.

36. While visiting the Iyanbito home, Mr. Wilson discovered that Ms. Julia Gabehart

lived at the Iyanbito home. Mr. Wilson had a brief conversation with Ms. Gabehart, whom was

on the phone at the time. Ms. Gabehart reported renting that location for about two-years.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 7 of 24

37. Ms. Julia Gabehart applied for a New Mexico driver’s license listing the Iyanbito

home address on September 14, 2010. [Department Exhibit AA].

38. In doing a property record search on the Iyanbito home address, Mr. Wilson

discovered a listing for Ms. Terri Tom. On February 14, 2012, the Department’s Mr. Wilson had

a telephone conversation with Ms. Terri Tom. Ms. Tom reported that she, her husband, and two

kids had rented the Iyanbito home in 2003 through 2008 and paid Taxpayer $500 per month in

rent. Ms. Tom reported that Taxpayer had moved with his whole family to Gallup during that

time. [Department Exhibit EE].

39. Ms. Terri Tom is the sister of Vickie Hand, the other party involved in

contentious litigation with Taxpayer over the foreclosure of the Iyanbito home.

40. On March 1, 2012, the Department requested a protest hearing in this matter.

41. On March 2, 2012, the Hearings Bureau of the Taxation and Revenue Department

sent notice of hearing, setting this matter for hearing on June 5, 2012.

42. On May 31, 2012, upon Taxpayer’s requests, the Hearings Bureau continued the

June 5, 2012 protest hearing and rescheduled the matter for September 6, 2012.

43. As of the scheduled hearing on September 6, 2012, the Department calculated that

Taxpayer owed $30,522.00 in unpaid personal income tax, $6,104.40 in penalty, and $5,629.03

in interest under the issued assessments. [Department Exhibit GG]

DISCUSSION

At issue in this protest is whether Taxpayer’s personal income in tax years 2004, 2005,

2007, 2008, 2009, and 2010 was exempt from New Mexico Personal Income tax under the

“earnings by Indians… on Indian lands” exemption, as found under to NMSA 1978, §7-2-5.5

(1995). Tax year 2006 is not at issue because Taxpayer did not claim the exemption that year and

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 8 of 24
the Department did not issue an assessment for that year. Further, although Melvina Murphy was

named in each assessment, the parties agree that she never claimed the exemption at issue and

that she has no outstanding tax obligations at dispute (except for her interest in the marital

community property).

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, the Taxpayer has the burden to overcome the assessments

and show he was entitled to an exemption of personal income tax. 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).

Taxpayer is claiming an exemption to payment of New Mexico personal income tax.

“Where an exemption or deduction from tax is claimed, the statute must be construed strictly in

favor of the taxing authority, the right to the exemption or deduction must be clearly and

unambiguously expressed in the statute, and the right must be clearly established by the taxpayer.”

Wing Pawn Shop v. Taxation and Revenue Department, 111 N.M. 735, 740, 809 P.2d 649, 654 (Ct.

App. 1991). In other words, in addition to the presumption of correctness, because an exemption is

at issue, Taxpayer must clearly establish that he qualified for the exemption.

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).

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 9 of 24
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 Taxpayer can demonstrate that he was entitled to the exemption under NMSA 1978, §7-2-5.5

(1995) during the relevant time, then Taxpayer’s income attributable to his work at the McKinley

Mine on the Navajo Nation during tax years 2004, 2005, 2007, 2008, 2009, and 2010 would not

be subject to New Mexico personal income tax and the assessments would not be supported.

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

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

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 10 of 24
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 at issue in that case was also a resident of Arizona, 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,

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.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 11 of 24
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

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

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 12 of 24
the McClanahan presumption against taxation, Native Americans “going beyond reservation

boundaries” are generally subject to State tax. id. at 112-113.

The Statutory Exemption.

This historical background provides context to the statutory exemption NMSA 1978, §7-

2-5.5 (1995) cited above. The statute cannot be interpreted to conflict with the federal

constitutional law discussed in the above-cited cases.

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. 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). In this case, there is no dispute that

Taxpayer derived income from working for the McKinley Mine on the Navajo Nation.

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

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

boundaries” of tribal land.

The Department argues that a residency/domicile analysis is the appropriate standard to

determine whether under NMSA 1978, §7-2-5.5 (1995) a person lives within the boundaries of

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 13 of 24
tribal land. In other decisions and orders issued by the Department’s Hearings Bureau, the

undersigned hearing officer has declined to fully adopt and apply the residency and domicile

approach advocated by the Department. See Matter of Protest of Aurelia Shorty, No. 11-17, and

Matter of Protest of John and Bonnie Yearley, No. 11-29.

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.

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

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 14 of 24
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

the boundaries” as equivalent to “residency” and/or “domicile,” nor references the words

“residency” or “domicile” in any manner.

Unlike “domicile”, which also gives weight to a person’s intention, 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 federal case law addressed by McClanahan

and its progeny, which placed a strong emphasis on the geographical component of tribal

sovereignty in the Indian income tax exemption context. 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. 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 the determinative factor under the

exemption at issue in this protest.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 15 of 24
Application of Exemption to the Facts at Protest.

Taxpayer asserts that he lived within the Navajo Nation during the relevant period.

However, Taxpayer did not carry his burden under the presumption of correctness to overcome

the assessment and to establish that he was entitled to exemption of personal income tax. While

it is possible that Taxpayer in fact lived at his Iyanbito home, it is equally possible based on the

other evidence that Taxpayer lived off the Navajo Nation in Gallup during the relevant period.

Consequently, since the evidence does not support by the preponderance that Taxpayer lived

within the Navajo Nation at his Iyanbito home during the relevant period of time, Taxpayer was

not entitled to claim the exemption from personal income under NMSA 1978, §7-2-5.5 (1995)

and the Department’s assessment is correct.

Almost all of the documentary evidence in the record suggests that Taxpayer resided at

that Gallup home address during the relevant period. Taxpayer maintained his voter’s

registration at the Gallup home. Although Taxpayer affirmatively testified that he did not vote,

the evidence showed that Taxpayer in fact voted using his Gallup home registration in the 2004

and 2008 general elections. Taxpayer maintained his driver’s license listing his Gallup home

address as both a mailing and physical address. Taxpayer registered and maintained vehicle

registrations on two separate vehicles during the period at issue using his Gallup home address.

Taxpayer explained that he used the Gallup home address consistently as a mailing

address on forms because Iyanbito did not have mail delivery. However, when given an

opportunity to list a separate physical address on his Ford vehicle registration address,

Department Exhibit BB, Taxpayer nevertheless listed his Gallup home address as both his

mailing address and his physical address. On Department Exhibit CC, Taxpayer declined to list

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 16 of 24
any separate physical address different from his Gallup home mailing address on the Chevrolet

vehicle registration.

Taxpayer testified that for cultural reasons, it was very important for him to live with his

son Clinton at the Iyanbito home on the Navajo Nation. While Taxpayer’s testimony about living

with Clinton at the Iyanbito home is plausible in light of the clear importance Taxpayer placed

on cultural tradition, all other documentary evidence in this record is contradictory and suggests

that Clinton Clah lived at the Gallup home address. As Taxpayer acknowledged, Clinton Clah

attended school in Gallup, which naturally made the Gallup home address far more convenient

during the school year than the Iyanbito home address some 20-miles away from Gallup. Clinton

Clah used the Gallup home address as both a physical address and a mailing address for his New

Mexico driver’s license. While Taxpayer, filing separately as head of household, claimed Clinton

Clah as a dependent on his income tax returns in 2004 through 2008, all of those returns listed a

Gallup address rather than Taxpayer’s Iyanbito home address. In 2009 and 2010, Taxpayer and

Melvina Murphy filed their income tax returns jointly using their Gallup home address and

claimed Clinton Clah and Mikhala Clah as dependents.

By some 25-minutes each way of commuting time, Taxpayer’s work at the McKinley

Mine during the relevant period was closer to Taxpayer’s Gallup home than to Taxpayer’s

Iyanbito home. In fact, looking at Google maps it appears that in order for Taxpayer to get to

work from his Iyanbito home, Taxpayer would need to drive through Gallup. Considering that

Taxpayer’s wife and daughter also resided in Gallup and that Clinton Clah attended school in

Gallup, it is not particularly plausible that for six-years Taxpayer would choose to live away

from his family and hub of his family activity despite driving through that town every day in

order to get back and forth to work. It is also worth mentioning that on November 29, 2011,

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 17 of 24
Taxpayer told the Department’s Barry Wilson that he and his entire family lived at the Iyanbito

home during the relevant period. That earlier statement differs significantly from the undisputed

evidence presented at hearing, Taxpayer’s sworn testimony at hearing, and Ms. Murphy’s sworn

testimony at hearing that Ms. Murphy and the couples’ two daughters at all times resided at the

Gallup home.

Taxpayer also filed all six of his tax returns under penalty of perjury with the IRS listing

an address in Gallup. In 2004 and 2005, Taxpayer listed a PO Box 2652, Gallup, NM 87305 on

his returns. Neither party presented any evidence on the record about this PO Box 2652, Gallup,

NM 87305 address, so it is impossible to say much about it other than that address is in Gallup

rather than Iyanbito. In tax years 2006 and 2007, Taxpayer filed his tax returns listing his address

as PMB 455 2418 E. Historic Hwy 66, Gallup, NM 87301. Again, neither party established any

evidence about this address, but the address is in Gallup rather than Iyanbito. In tax years 2008,

2009, and 2010, Taxpayer’s income tax returns all list his Gallup home address. Because

Taxpayer self-reported (under penalty of perjury) his home address in Gallup on his tax returns

for all six years, there is convincing evidence that Taxpayer in fact lived within Gallup and not

Iyanbito on the Navajo Nation during the relevant period.

In 2012, Ms. Julia Gabehart told Department investigator Barry Wilson that she had been

renting the Iyanbito home for two years. Ms. Gabehart had no known motive of hostility against

Taxpayer. Further, that fact that Ms. Gabehart used the Iyanbito home address when applying for

her New Mexico driver’s license on September 14, 2010, provides an indication that her hearsay

statement is reliable. Since Ms. Gabehart’s rental period largely fell outside of the period in

question, the statements of Ms. Gabehart alone do not establish whether Taxpayer lived at the

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 18 of 24
Iyanbito home during that period, but they do show that Taxpayer had rented the Iyanbito home

contrary to his November 29, 2011 statement to Mr. Wilson that he had never rented that home.

The Department presented hearsay evidence from Terri Tom that in 2003 through 2008

she rented the Iyanbito home from Taxpayer for $500 per month. While hearsay is generally

admissible in an administrative hearing, it is only given weight to the extent it is reliable. In this

case, there is evidence that Terri Tom is the sister of Vickie Hand, whom was involved in

contentious litigation with Taxpayer over the foreclosure of the Iyanbito home. Consequently,

the hearsay statements of Ms. Tom are of limited weight given the potential for hostility related

to the litigation. However, while alone insufficient to raise questions about whether Taxpayer

lived at his Iyanbito address, this evidence still has some persuasive weight taken in conjunction

with the other competent documentary evidence cited above and the statements of Ms. Julia

Gabehart that Taxpayer had rented her the Iyanbito home.

Moreover, three inconsistencies in the record undermined the credibility of Taxpayer’s

assertion of residency in Iyanbito. The first inconsistency is Taxpayer’s testimony that he never

voted, which was contradicted by evidence that Taxpayer voted in 2004 and 2008. The second

inconsistency is that Taxpayer told Mr. Wilson that his whole family had lived with him in

Iyanbito. However, it is undisputed that Ms. Murphy and Taxpayer’s daughter at all times

resided at the Gallup home and not in Iyanbito. The final potential inconsistency is when

Taxpayer told Mr. Wilson that he had never rented the Iyanbito home, which was contradicted

by Ms. Gabehart’s statement, license application, and presence at the Iyanbito home.

In sum Taxpayer simply did not factually prove that he lived in Iyanbito during the

relevant period by the preponderance of the evidence. If anything the bulk of the evidence

showed that it was more likely than not that Taxpayer resided in Gallup during the period at

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 19 of 24
issue. Considering Taxpayer’s dual burdens of establishing he was entitled to an exemption from

income tax and to overcome the presumption of correctness of the assessments, Taxpayer’s

testimony is insufficient in the face of significant contradictory evidence. Since Taxpayer did not

establish that he lived within the boundaries of the Navajo Nation, he was not entitled to an

exemption of income tax under NMSA 1978, §7-2-5.5 (1995).

Residency and Domicile

While the domicile factors are not dispositive of the analysis under the exemption, those

factors nevertheless have some relevancy in the analysis to the extent that the domicile factors

coincide with factual indicators of where someone is physically located during any specific

period. Moreover, because the Department persisted with its domicile argument in this matter,

for the sake of argument, those factors will be addressed.

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.

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 20 of 24
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;
(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.

Considering the evidence in this protest within the rubric of the twelve domicile factors

articulated under Regulation §3.3.1.9(C)(4) NMAC (4/29/2005), Taxpayer did not establish he

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 21 of 24
was domiciled on the Navajo Nation in his Iyanbito home during the relevant period. Of the

twelve factors, four factors are not applicable or the record is devoid of information to make any

determination: (e) domicile in previous years (which is too closely related to the dispute of the

protest to determine separately from the protest); (f) ownership of real property other than

residences (the record is devoid of this evidence); (g) location of financial transactions (the

record is devoid of this evidence); and (m) possessions of significant sentimental value (the

record is devoid of this evidence).

Granting Taxpayer every reasonable inference, Taxpayer has four factors supporting

domicile in Iyanbito: (a) homes owned (the Iyanbito home is larger than the Gallup home); (b)

where individual spends their time (Taxpayer testified that he was only in Gallup one-day a week

while he spent the rest of the time based out of the Iyanbito home); (c) place of employment

(Taxpayer works on the Navajo Nation, though the Iyanbito home is located further away from

his work than Taxpayer’s Gallup home); and (h) place of community affiliations (Taxpayer is

member of the Navajo Nation and feels a strong obligation to pass on those community values to

his son).

Four factors support the Department’s position that Taxpayer was domiciled in Gallup:

(d) home of person’s family (wife, daughter, and most likely son based on documentary evidence

resided in Gallup); (i) home address for filing federal income taxes (alls returns list a Gallup

address); (j) voter registration (Taxpayer is registered to vote in Gallup); (k) driver’s licenses and

other professional licenses (Taxpayer is licensed with his Gallup home listed as his mailing and

physical address).

Under the domicile analysis four factors support Taxpayer’s position and four factors

support the Department’s position. Although the domicile factors determination cannot be

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 22 of 24
reduced to a simple mathematical equation, it is difficult to see Taxpayer prevailing under the

presumption of correctness when the factors are balanced so closely between the parties.

Taxpayer’s argument fails to persuade both under the “lives within” standard contained under the

exemption and under the Department’s alternative domicile theory of the exemption.

Assessment of Penalty.

Taxpayer argued that imposition of penalty was inappropriate in this matter given that

Taxpayer did not claim the exemption in 2006, when he was not working at McKinley Mine on

the Navajo Nation. Taxpayer’s argument is not persuasive.

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

(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 twenty 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, Taxpayer did not file and pay the appropriate New Mexico personal income

taxes in 2004, 2005, 2007, 2008, 2009, and 2010 when due. Taxpayer’s inaction in failing to pay

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 23 of 24
personal income taxes when required meets the legal definition of “civil negligence” under the

penalty statute. 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 on the assessments.

CONCLUSIONS OF LAW

1. Taxpayer filed a timely, written protest of the assessments for 2004, 2005, 2007,

2008, 2009, and 2010 personal income taxes, penalty, and interest, and jurisdiction lies over the

parties and the subject matter of this protest.

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

Nation during the relevant period, as required in order to claim the applicable exemption under

NMSA 1978, §7-2-5.5 (1995).

3. In the alternative, Taxpayer failed to demonstrate that he was domiciled on the

Navajo Nation during the relevant period.

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

Taxpayer is liable for personal income tax principal totaling $30,522, interest as of the date of

hearing totaling $5,629.03, and penalty totaling $6,104.40 in tax years 2004, 2005, 2007, 2008,

2009, and 2010. Interest continues to accrue until the tax obligation is satisfied.

For the foregoing reasons, the Taxpayer's protest IS DENIED.

DATED: September 21, 2012.

Brian VanDenzen, Esq.
Tax Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of the Protest of Edward J. Clah and Melvina Murphy, page 24 of 24