Did New Mexico's active-duty military pay exemption cover a commissioned U.S. Public Health Service officer because PHS is part of the uniformed services?

Plain-English summary

Pay earned by a commissioned U.S. Public Health Service officer did not qualify for New Mexico's active-duty armed-forces income-tax exemption. PHS belongs to the broader “uniformed services,” but the statute exempted only service in the “armed forces.”

Dr. David Wong worked in New Mexico as an active PHS officer. On informal advice from colleagues, he and Aileen Wong treated his wages as exempt on their 2008 through 2011 New Mexico returns.

After audit, they conceded the tax principal and paid it on June 20, 2013, stopping further interest. The remaining dispute concerned $1,170.20 in penalty and $1,919.26 in interest.

“Uniformed services” was broader than “armed forces”

Section 7-2-5.11 exempted salary paid by the United States for active-duty service in the armed forces. The federal definition in 10 U.S.C. § 101(a)(4) listed the Army, Navy, Air Force, Marine Corps, and Coast Guard.

Congress separately included the PHS Commissioned Corps within the broader uniformed services. The decision treated that separate listing as evidence that PHS was not one of the armed forces covered by New Mexico's exemption.

New Mexico's PIT-ADJ instructions throughout the relevant years also identified only those five armed-force branches. In 2011, the Department added an express statement that PHS pay did not qualify. The hearing officer found that the earlier instructions were already clear because PHS never appeared in the qualifying list.

Informal colleague advice did not defeat negligence

The Wongs argued that the Department should have communicated more directly with PHS members. The decision said New Mexico's self-reporting system instead charged taxpayers with reasonably investigating the tax consequences of their actions.

The Wongs had not consulted an accountant or attorney. They relied on colleagues without independently researching the statutory wording, federal definition, or Department instructions.

Given those materials, the decision found that the mistaken exemption claim was an erroneous belief constituting negligence. It was not a good-faith mistake of law on reasonable grounds because the Wongs had done no independent research.

Interest was separately mandatory from the original tax due dates until the principal was paid.

Result: protest denied. The Wongs owed $3,089.46 in penalty and interest after paying the underlying tax.

What this means for you

Members of the Public Health Service Commissioned Corps

Do not assume every benefit using “military” or “uniformed services” language applies. The exact statutory term controlled here, and “armed forces” did not include PHS.

Taxpayers relying on coworkers

Informal workplace advice did not establish reasonable grounds for an exemption. Check the statute, official instructions, and qualified professional advice.

Preparers reviewing military-pay deductions

Confirm both the service branch and the precise year-specific law. Similar federal status labels may have different tax consequences.

Common questions

Q: Is PHS part of the uniformed services?
A: Yes. But the decision held that it is not part of the narrower federal definition of armed forces used by the New Mexico exemption.

Q: Which services did the decision identify as armed forces?
A: The Army, Navy, Air Force, Marine Corps, and Coast Guard.

Q: Did the Wongs continue disputing the tax principal?
A: No. They withdrew that part of the protest and paid the assessed principal on June 20, 2013.

Q: Why was the penalty upheld?
A: They relied on colleague statements without researching the law or consulting a qualified tax professional, despite official instructions listing the qualifying branches.

Q: What remained due after principal was paid?
A: $1,170.20 in penalty and $1,919.26 in interest, totaling $3,089.46.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-5.11 — active-duty armed-forces pay exemption
• 10 U.S.C. § 101(a)(4) — federal definition of armed forces
• NMSA 1978, § 7-1-17(C) — presumption of assessment correctness
• NMSA 1978, § 7-1-67 — mandatory interest
• NMSA 1978, § 7-1-69 and Regulations 3.1.11.10-.11 NMAC — negligence penalty and exceptions

Cases cited:

• Wing Pawn Shop v. Taxation and Revenue Department, 1991-NMCA-024
• TPL, Inc. v. New Mexico Taxation & Revenue Department, 2003-NMSC-007
• Tiffany Construction Co. v. Bureau of Revenue, 1976-NMCA-127
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Aileen & David Wong
• Decision PDF: D&O 13-21

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
AILEEN & DAVID WONG No. 13-21
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO. L0539001664, L1075872576, L0002130752,
L1523809600, L0986938688 and L2060680512

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on August 6, 2013 before Brian

VanDenzen, Esq., Tax Hearing Officer, in Santa Fe. Dr. David Wong appeared pro se,

representing Aileen and David Wong (“Taxpayers”). Staff Attorney Aaron A. Rodriguez

appeared representing the State of New Mexico, Taxation and Revenue Department

(“Department”). Protest Auditor Milagros Bernardo appeared as a witness for the Department.

Department Exhibits E, H, J, and L were admitted into the record, as described in the

Administrative Exhibit Log. Based on the evidence and arguments presented, IT IS DECIDED

AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On May 9, 2013, the Department assessed Taxpayers $6,096.00 in personal

income tax principal, $0.00 in penalty, and $138.58 in interest for a total assessment of

$6,234.58 for the reporting period ending December 31, 2011. [Letter id. no. L0539001664]

2. On May 9, 2013, the Department assessed Taxpayers $6,016.00 in personal

income tax principal, $0.00 in penalty, and $358.65 in interest for a total assessment of

$6,374.65 for the reporting period ending December 31, 2010. [Letter id. no. L1075872576].

3. On May 9, 2013, the Department assessed Taxpayers $5,300.00 in personal

income tax principal, $0.00 in penalty, and $730.96 in interest for a total assessment of

$6,030.96 for the reporting period ending December 31, 2008. [Letter id. no. L0002130752].

4. On May 16, 2013, the Department assessed Taxpayers $5,726.00 in personal

income tax principal, $1,145.200.00 in penalty, and $596.60 in interest for a total assessment of

$7,467.80 for the reporting period ending December 31, 2009. [Letter id. no. L1523809600].

5. On May 16, 2013, the Department assessed Taxpayers $60.00 in personal income

tax principal, $12.00 in penalty, and $3.98 in interest for a total assessment of $75.98 for the

reporting period ending December 31, 2010. [Letter id. no. L0986938688].

6. On May 16, 2013, the Department assessed Taxpayers $65.00 in personal income

tax principal, $13.00 in penalty, and $2.07 in interest for a total assessment of $80.07 for the

reporting period ending December 31, 2011. [Letter id. no. L2060680512].

7. On May 31, 2013, Taxpayers filed a written protest of the assessments.

8. On June 14, 2013, the Department acknowledged receipt of Taxpayers’ protest.

9. On June 22, 2013, Taxpayers timely filed an amended protest email with

Department Protest Auditor Milagros Bernardo. In that amended protest, Taxpayers withdrew

their protest with respect to assessed personal income tax principal under each assessment, but

continued to protest the imposition of penalty and interest. [Department Ex. J].

10. On July 16, 2013, the Department requested a hearing in this matter.

11. On July 17, 2013, the Hearing Bureau issued Notice of Administrative Hearing,

scheduling this matter for August 6, 2013.

12. During the relevant period, Dr. Wong worked in New Mexico as an active officer

for the Public Health Service (“PHS”). [Department Ex. J].

In the Matter of the Protest of Aileen and David Wong, page 2 of 10

13. PHS is part of the United States military’s Uniformed Services. [Department Ex.

J].

14. Based on informal statements and advice of Dr. Wong’s colleagues, when filing

their personal income tax returns, Taxpayers claimed an exemption from income tax for Dr.

Wong’s wages earned while employed as an active officer with PHS in personal income tax

years 2008, 2009, 2010, and 2011. [08-06-13 CD 14:44-15:03].

15. Taxpayers did not consult with an accountant or an attorney before submitting

their 2008 through 2011 personal income tax returns. [08-06-13 CD 14:31-44].

16. In 2008 through 2011, the Department’s “Instructions for PIT-ADJ Schedule of

Additions and Deductions/Exemptions” stated that pay from members of “active duty military

service in the armed forces of the United States” may be listed on line 15 of the PIT-ADJ and

may be exempted from state income tax. The Department’s instructions further indicated that

“armed forces” includes the Army, Navy, Air Force, Marine Corps, and Coast Guard.

[Department Ex. E-8].

17. In addition to the instruction identified in FOF #16, in its “Instructions for 2011

PIT-ADJ Schedule of Additions and Deductions/Exemptions” the Department added an express

instruction that the “[p]ay, wages or salaries paid by the U.S. Public Health Services does not

qualify for the exemption.” [Department Ex. H-8].

18. On June 20, 2013, Taxpayers paid the assessed personal income tax under the

assessments, stopping further interest accrual. [Department Ex. J; 08-06-13 CD 21:34-22:26].

19. As of June 20, 2013, Taxpayers still owed $1,919.26 in interest and $1,170.20 in

penalty under the assessments. [Department Ex. L].

In the Matter of the Protest of Aileen and David Wong, page 3 of 10
DISCUSSION

The case originates from Taxpayers’ claim for exemption of personal income taxes on

Dr. Wong’s wages from PHS under NMSA 1978, Section 7-2-5.11 (2007) in tax years 2008,

2009, 2010, and 2011. Upon audit, the Department denied Taxpayers’ claimed exemption and

accordingly assessed Taxpayers for personal income taxes, penalty and interest. Taxpayers

protested those assessments. Taxpayers eventually amended their protest, agreeing they were

liable for personal income tax principal in each assessed year, but continuing to challenge the

assessed penalty and interest.

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

presumed correct. Consequently, Taxpayers have the burden to overcome the assessments. See

Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428, 431. Moreover, “[w]here 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, 1991-NMCA-024, ¶16, 111 N.M. 735, 740 (internal citation

omitted); See also TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447,

451.

While Taxpayers conceded they were liable for the assessed personal income tax

principal in each assessment, the substance of the exemption under Section 7-2-5.11 is still

relevant because it provides context to the analysis of the civil negligence penalty issue. Under

Section 7-2-5.11, “[a] salary paid by the United States to a taxpayer for active duty service in the

armed forces of the United States is exempt from state income taxation.” (emphasis added).

In the Matter of the Protest of Aileen and David Wong, page 4 of 10
Federal law provides a definition for “armed forces of the United States.” Under 10

U.S.C. § 101(a)(4) (2013) “armed forces” means “the Army, Navy, Air Force, Marine Corps,

and Coast Guard.” PHS members are not included in the federal definition of armed forces. In

fact, Congress distinctly lists members of the armed forces, commissioned corps members of

NOAA, and commissioned corps members of PHS in its definition of the broader “uniformed

services.” By not including PHS in the list of “armed forces” and separately listing armed forces

from PHS in the definition of “uniformed services,” it is clear that Congress did not intend PHS

to be considered armed forces.

Consistent with this federal definition of “armed forces,” in all of its “Instructions for

PIT-ADJ Schedule of Additions and Deductions/Exemptions” for the relevant period, the

Department informed taxpayers that armed forces included the Army, Navy, Air Force, Marine

Corps, and Coast Guard. In 2011, the Department expressly added that members of PHS do not

qualify for the exemption to its PIT-ADJ Schedule instructions. However, even before 2011, the

language of the statute, the federal definition of armed forces, and the Department’s

accompanying instructions to the PIT-ADJ Schedule made it clear that only members of the

armed forces—the Army, Navy, Air Force, Marine Corps, and Coast Guard—were eligible for

the exemption. While there is no doubt that Dr. Wong and other members of PHS provide a

valuable public service, the New Mexico Legislature choose to limit the exemption from income

tax under Section 7-2-5.11 to members of the armed forces rather than include all members of

the uniformed services. Thus, the wages any taxpayer earned from PHS were not entitled to a

exemption under Section 7-2-5.11. Hence, Taxpayers rightfully conceded that they were not

entitled to an exemption under Section 7-2-5.11 for Dr. Wong’s PHS wages and thus liable for

the assessed personal income tax principal on those wages during the relevant period.

In the Matter of the Protest of Aileen and David Wong, page 5 of 10
Taxpayers nevertheless argued that they should not be held liable for penalty and interest

in this matter because they claimed it was unreasonable for the Department to not communicate

with members of the PHS that they did not qualify for the exemption under Section 7-2-5.11

when it became clear that PHS members were claiming that exemption. By failing to

communicate that PHS members were not entitled to the exemption, Taxpayers argued that the

Department did not meet the same “ordinary business care and prudence” standard that the

public is held to under Regulation 3.1.11.10 NMAC, and therefore penalty and interest should be

abated.

When a taxpayer fails to make timely payment of taxes due to the state, “interest shall be

paid to the state on that amount from the first day following the day on which the tax becomes

due...until it is paid.” NMSA 1978, § 7-1-67 (2007) (italics for emphasis). Under the statute,

regardless of the reason for non-payment of the tax, the Department has no discretion in the

imposition of interest, as the statutory use of the word “shall” makes the imposition of interest

mandatory. See Marbob Energy Corp. v. N.M. Oil Conservation Comm'n, 2009-NMSC-013, ¶22,

146 N.M. 24, 32 (use of the word “shall” in a statute indicates provision is mandatory absent clear

indication to the contrary). The language of the statute also makes it clear that interest begins to run

from the original due date of the tax and continues until the tax principal is paid in full. The

Department has no discretion under Section 7-1-67 and must assess interest against Taxpayers from

the time the personal income tax was due but not paid until when Taxpayers paid the tax on June 20,

2013.

When a taxpayer fails to pay taxes due to the State because 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

In the Matter of the Protest of Aileen and David Wong, page 6 of 10
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).

As discussed above, 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 like here, Taxpayers actions or inactions were unintentional.

In instances where a taxpayer might otherwise fall under the definition of civil negligence

generally subject to penalty, NMSA 1978 Section 7-1-69 (B) (2003) provides a limited

exception: “No penalty shall be assessed against a taxpayer if the failure to pay an amount of tax

when due results from a mistake of law made in good faith and on reasonable grounds.” Further,

under Regulation 3.1.11.11 NMAC, there are several situations where a taxpayer can show

nonnegligence, none of which were demonstrated in this protest.

Regulation 3.1.11.10 NMAC 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.”

Although Taxpayers argue that the Department should be held to this same ordinary

business case care and prudence standard articulated under Regulation 3.1.11.10 (A) NMAC, there

is no statute, regulation, or case law that applies this same standard to the Department. Perhaps this

is because under New Mexico's self-reporting tax system, “every person is charged with the

reasonable duty to ascertain the possible tax consequences” of his or her actions. Tiffany

Construction Co. v. Bureau of Revenue, 1976-NMCA-127, ¶5, 90 N.M. 16, 17. While the

In the Matter of the Protest of Aileen and David Wong, page 7 of 10
Department should provide guidance (which it in fact did in this case in the form of the PIT-ADJ

Schedule instructions), ultimately under the rationale expressed in Tiffany Construction Co.,

Taxpayers have a reasonable duty to report accurately their tax liabilities. This reasonable duty

might require the person to consult with a qualified tax professional. See id. Under Tiffany

Construction Co., failure to do reasonable research into what the tax law requires or to meet with a

qualified tax professional “may constitute negligence.” Id.

While Taxpayers argued that the Department should have provided more information to

PHS that PHS commissioned corps were not eligible for the exemption, the Department’s

instructions throughout the relevant period clearly spelled out that only members of the Army, Air

Force, Marine Corps, Navy, and Coast Guard qualified for the exemption. By omission from the

list, it is reasonably clear that PHS members are not eligible for the exemption. The fact that in

2011 the Department added a specific provision that PHS members are not entitled to an

exemption under Section 7-2-5.11 does not alter the analysis in this case because the previous

instructions in no way suggested, either expressly or implicitly, that PHS members might qualify

for the exemption. Ultimately, Taxpayers themselves had an obligation under Tiffany Construction

Co. to conduct their own research about the requirements of the law or consult with a tax

professional.

Considering that Wing Pawn Shop, ¶16, 740, places the onus on taxpayers to clearly

establish they were entitled to exemption from taxation, the absence of PHS from that list on the

instructions would cause a reasonable taxpayer acting with ordinary business care and prudence to

contact a qualified tax professional before claiming the exemption. Given the unambiguous

language of the statute, the federal definitions of armed forces, and the Department’s instructions, a

tax professional would have been able to determine quickly that PHS members were not entitled to

In the Matter of the Protest of Aileen and David Wong, page 8 of 10
the exemption. Taxpayers did not consult with a tax professional before claiming an exemption

from personal income tax on Dr. Wong’s wages. Instead, Dr. Wong acknowledged that he relied

on the representations of his colleagues at PHS that his wages were exempt under Section 7-2-5.11

rather than conducting his own independent research or consulting with a qualified tax

professional.

Without doing any independent research into the requirements of the exemption, it cannot

be said under Section 7-1-69 (B) that Taxpayers’ error resulted from a mistake of law made in

good faith. Moreover, by failing to independently research the requirements of the exemption,

Taxpayers relied on an erroneous belief that they were entitled to the exemption. An erroneous

belief constitutes civil negligence under Regulation 3.1.11.10 (C) NMAC. Finally, by not

consulting with a qualified tax professional about the exemption, Taxpayers were negligent under

Regulation 3.1.11.10 (A) NMAC and under the rationale discussed in Tiffany Construction Co., ¶5,

17. Consequently, Taxpayers are liable for the assessed penalty and interest. Taxpayers’ protest is

denied.

CONCLUSIONS OF LAW

A. Taxpayers filed a timely, written protest to the assessments. Jurisdiction lies over the

parties and the subject matter of this protest.

B. Taxpayers, in filing an amended protest, conceded that they were not entitled to an

exemption of personal income tax under Section 7-2-5.11 for Dr. Wong’s wages earned while on

active duty with PHS.

C. Under NMSA 1978, Section 7-1-67 (2007), Taxpayers are liable for accrued

interest under the assessments.

In the Matter of the Protest of Aileen and David Wong, page 9 of 10
D. Under Regulation 3.1.11.10 (C) NMAC, Taxpayers’ erroneous belief was

negligent. Given the unambiguous language of the statute, the federal definition of armed forces,

and the Department’s instructions, Taxpayers’ failure to consult with a qualified tax professional

in this matter constituted negligence under Regulation 3.1.11.10 (A) NMAC and under Tiffany

Construction Co., ¶5, 17. Thus, Taxpayers are liable for civil penalty pursuant to Section 7-1-69

(2007).

For the foregoing reasons, Taxpayers’ protest IS DENIED. Taxpayers owe $1,919.26 in

interest and $1,170.20 in penalty for a total outstanding liability of $3,089.46.

DATED: August 13, 2013.

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 Aileen and David Wong, page 10 of 10