Were a U.S. Public Health Service officer's active-duty wages exempt from New Mexico income tax, and could accountant reliance remove the penalties?

Plain-English summary

Kathleen Franklin's 2009-2012 U.S. Public Health Service wages were taxable in New Mexico, but every civil penalty was abated because she reasonably relied on her accountant's advice after disclosing the facts of her service. Interest remained mandatory.

Franklin was an active-duty commissioned PHS officer. She timely filed New Mexico personal income tax returns and claimed Section 7-2-5.11's exemption for salary paid by the United States for active-duty service in the armed forces.

The Department assessed:

• 2009: $2,783.00 tax, $556.60 penalty, and $354.70 interest;
• 2010: $3,051.00 tax, $610.20 penalty, and $263.05 interest;
• 2011: $3,053.00 tax, $610.60 penalty, and $157.90 interest; and
• 2012: $3,240.00 tax, $583.20 penalty, and $71.11 interest.

PHS service did not satisfy the armed-forces exemption

The New Mexico statute did not define “armed forces.” Regulation 3.3.1.9(D)(5) included PHS officers only when detailed by proper authority to the Army or Navy, although the decision noted that this regulation addressed residency.

Federal law separately defined “armed forces” and “uniformed services.” The latter included the commissioned PHS corps, while the former listed the Army, Navy, Air Force, Marine Corps, and Coast Guard.

Franklin argued that federal wartime law gave PHS members the privileges afforded commissioned Army officers. The AHO found that 42 U.S.C. §§ 213 and 213a specified the applicable privileges, and the New Mexico income-tax exemption was not among them.

The 2009 and 2010 return instructions defined armed forces. The 2011 and 2012 instructions went further and specifically excluded PHS pay from the exemption.

The AHO therefore upheld the tax for all four years.

Reasonable accountant reliance removed every penalty

Franklin fully disclosed the facts of her active-duty PHS service. Her accountant identified the exemption, advised her to claim it, and represented her with a detailed argument that PHS wartime status should count as armed-forces service.

The accountant had erred by not following the explicit 2011 and 2012 instructions. But the AHO held that one error did not automatically make the accountant incompetent. The legal position was mistaken but sufficiently nuanced that Franklin's reliance was not unreasonable.

Regulation 3.1.11.11 therefore required abatement of the penalties for 2009, 2010, 2011, and 2012.

Interest still applied because the principal tax was not paid when due.

Result: protest GRANTED IN PART and DENIED IN PART. Tax and interest remained; all assessed penalties were abated.

What this means for you

USPHS officers

Under the law applied in this decision, active-duty status and wartime military privileges did not by themselves make PHS wages active-duty armed-forces pay for New Mexico's exemption.

Taxpayers relying on professionals

Penalty relief can survive a professional's legal mistake when the taxpayer fully disclosed the facts and reasonably relied on a competent adviser. This decision distinguished a mistaken but developed legal analysis from uninformed return preparation.

Accountants and tax preparers

Read both the statute and the year-specific instructions. The accountant's failure to follow explicit instructions did not defeat this taxpayer's reliance, but the underlying exemption was still denied.

Common questions

Q: Was Franklin on active duty?
A: Yes. The dispute was whether active PHS service counted as service in the “armed forces” for this exemption.

Q: Did federal law call the PHS a uniformed service?
A: Yes. The decision relied on federal definitions distinguishing uniformed services from armed forces.

Q: Why were the 2011 and 2012 penalties abated despite clear instructions?
A: Franklin had fully disclosed her status and reasonably relied on an accountant whom the AHO found competent despite the mistaken, nuanced legal position.

Q: Was interest also abated?
A: No. Interest remained mandatory on tax not paid when due.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-3 and 7-2-5.11 — resident income tax and active-duty armed-forces pay exemption
• NMSA 1978, §§ 7-1-17, 7-1-3, and 7-1-67(A) — assessment presumption, definition of tax, and interest
• NMSA 1978, § 20-1-2 — conformity with federal military laws and regulations
• Regulations 3.3.1.9(D)(5) and 3.1.11.11 NMAC — armed-forces definition and accountant-reliance relief
• 5 U.S.C. §§ 2101 and 8331; 10 U.S.C. § 101 — armed forces, uniformed services, and military service
• 42 U.S.C. §§ 213 and 213a — wartime privileges for PHS officers

Cases cited:

• Security Escrow Corp. v. State Taxation and Revenue Department, 1988-NMCA-068 — strict proof of an exemption
• Marbob Energy Corp. v. New Mexico Oil Conservation Commission, 2009-NMSC-013 — mandatory interest

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Kathleen Franklin
• Decision PDF: D&O 14-38

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
KATHLEEN FRANKLIN, No. 14-38
TO ASSESSMENTS ISSUED UNDER
LETTER ID NOS. L1869522384, L0527345104,
L1601086928, and L1229352400

DECISION AND ORDER

A formal hearing on the above-referenced protest was held October 23, 2014, before Dee

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

represented by Ms. Elena Morgan, Staff Attorney. Ms. Milagros Bernardo, Auditor, also appeared

on behalf of the Department. Ms. Theresa Carmichael, CPA, appeared on behalf of and

represented Kathleen Franklin (Taxpayer) at the hearing. The Hearing Officer took notice of all

documents in the administrative file. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On January 13, 2014, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2010. The assessment

was for $3,051.00 tax, $610.20 penalty, and $263.05 interest.

2. On January 13, 2014, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2011. The assessment

was for $3,053.00 tax, $610.60 penalty, and $157.90 interest.

3. On January 13, 2014, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2012. The assessment

was for $3,240.00 tax, $583.20 penalty, and $71.11 interest.

4. On January 31, 2014, the Taxpayer filed a formal protest letter to the assessments.

5. On February 24, 2014, the Department assessed the Taxpayer for personal income tax,

penalty, and interest for the tax period ending on December 31, 2009. The assessment

was for $2,783.00 tax, $556.60 penalty, and $354.70 interest.

6. On April 1, 2014, the Department filed a Request for Hearing asking that the Taxpayer’s

protest filed January 31, 2014 be scheduled for a formal administrative hearing.

7. On April 1, 2014, the Hearings Bureau issued a notice of hearing. The hearing date was

set within ninety days of the protest.

8. On April 22, 2014, the Taxpayer requested a continuance of the hearing.

9. On April 22, 2014, the request for continuance was granted, and the delay of the hearing

was attributable to the Taxpayer.

10. On April 23, 2014, an amended notice of hearing was issued.

11. On May 19, 2014, the Taxpayer filed a formal protest letter to the assessment on the 2009

tax year and requested that the protest be consolidated with the protest filed on January

31, 2014.

12. On June 5, 2014, the Department filed a Request for Hearing asking that the Taxpayer’s

protest on the 2009 tax year be scheduled for a formal administrative hearing.

13. On June 6, 2014, the request to consolidate the protests was granted and an amended

notice of hearing was issued. The hearing was set within ninety days of the protest filed

on May 19, 2014.

14. On July 17, 2014, the Taxpayer requested a continuance of the hearing.

15. On July 21, 2014, the request for continuance was granted, and the delay of the hearing

was attributable to the Taxpayer.
Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 2 of 7

16. On July 24, 2014, the Hearings Bureau sent amended notices of hearing.

17. The Taxpayer filed timely PIT returns for the tax years in question. The Taxpayer

claimed an exemption on her personal income tax for the tax years in question.

18. The Taxpayer was working as a commissioned officer with the United States Public

Health Service (PHS) and was on active duty.

19. The PHS is a branch of the United States military.

20. The PHS is an unarmed branch of the military.

21. The PIT return instructions for the 2009 and 2010 tax years included a definition of

“armed forces”. The PIT return instructions for the 2011 and 2012 tax years also

included a definition of “armed forces”. However, the 2011 and 2012 PIT instructions

also specified that PHS is excluded from the exemption.

22. The Taxpayer was relying on advice from her accountant when she claimed the

exemptions.

DISCUSSION

The issue to be decided is whether the Taxpayer is liable for tax, penalty, and interest for

the tax years of 2009, 2010, 2011, and 2012.

Burden of Proof.

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

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

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

7-1-3. See also El Centro Villa Nursing Ctr. v. Taxation and Revenue Department, 1989-NMCA-

070, 108 N.M. 795. Therefore, the assessment issued to the Taxpayer is presumed to be correct,

Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 3 of 7
and it is the Taxpayer’s burden to present evidence and legal argument to show that she is

entitled to an abatement of the assessment.

Armed forces exemption.

A tax is levied on the personal income of every resident. See NMSA 1978, § 7-2-3

(1981). Salary paid by the United States “for active duty service in the armed forces of the

United States is exempt from state income taxation.” NMSA 1978, § 7-2-5.11 (2007). The

Taxpayer argued that she was entitled to the exemption as an active duty officer for PHS. See 5

U.S.C. § 8331 (2012) (defining military service to include service in the armed forces as well as

in the PHS). The burden is on the Taxpayer to prove that she is entitled to the exemption or

deduction. See Public Services Co. v. N.M. Taxation and Revenue Dep’t., 2007-NMCA-050, ¶

32, 141 N.M. 520. See also Till v. Jones, 1972-NMCA-046, 83 N.M. 743. “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.” Sec. Escrow

Corp. v. State Taxation and Revenue Dep’t., 1988-NMCA-068, ¶ 8, 107 N.M. 540. See also

Wing Pawn Shop v. Taxation and Revenue Dep’t., 1991-NMCA-024, ¶ 16, 111 N.M. 735. See

also Chavez v. Commissioner of Revenue, 1970-NMCA-116, ¶ 7, 82 N.M. 97.

“Armed forces” is not defined by the statute. See NMSA 1978, § 7-2-5.11. See also

NMSA 1978, § 7-1-3 (2013) and § 7-2-2 (2010). However, a definition for “armed forces”

occurs in a regulation under the Income Tax Act. See 3.3.1.9 NMAC (2010). The definition

relates to residency and includes all members of the army, navy, marines, air force, coast guard,

“and all officers of the public health service detailed by proper authority for duty either with the

army or the navy”. 3.3.1.9 (D) (5) NMAC (2010) (emphasis added). As the regulation
Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 4 of 7
specifically addresses situations concerning residency when a person is deployed, it is not clear

that the regulation would apply. Federal law also defines “armed forces” as “the Army, Navy,

Air Force, Marine Corps, and Coast Guard” and defines “uniformed services” as “the armed

forces, [and] the commissioned corps of public health service”. 5 U.S.C. § 2101 (1979). See

also 10 U.S.C. § 101 (2013).

The Department argued that the Taxpayer does not meet the federal definition of “armed

forces” and that the exemption does not apply. The Department argued that the statute only

allows for the exemption for members of the “armed forces” and that the legislature specifically

chose the language on “armed forces” as opposed to “uniformed services”. The Taxpayer argued

that the legislature provided for New Mexico to conform to all laws and regulations of the

federal government that affect the military. See NMSA 1978, § 20-1-2 (1987). The Taxpayer

argued that the laws of the federal government provide that members of PHS are considered the

same as commissioned officers of the Army during a time of war. See 42 USC § 213. The

Taxpayer argued that the U.S. has been in a state of war since it was declared in 1990 because

the declaration was never terminated. The Taxpayer argued that she was, therefore, entitled to be

treated as a member of the Army and should be entitled to the exemption.

During a time of war, members of PHS are entitled to all privileges afforded to

commissioned Army officers under any law of the U.S. See 42 USC § 213. The title and

sections of U.S. law to which a PHS member is entitled in time of war are specified in another

section. See 42 USC § 213a. The New Mexico income tax exemption does not appear on that

list. See id. Although the Taxpayer presented an interesting argument, it is ultimately not

persuasive. The term “armed forces” does not include PHS for purposes of the New Mexico

income tax exemption. Therefore, the assessments were proper.
Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 5 of 7
Assessment of Penalty.

The Taxpayer argued that she should not have to pay penalty. The Taxpayer argued that

she reasonably relied on advice from her accountant in claiming the exemption. A taxpayer may

be entitled to abatement of penalty when the taxpayer relied on advice of counsel or an

accountant, or in various other circumstances. See 3.1.11.11 NMAC (2001). The Department

argued that penalty should not be abated. The Department argued that the Taxpayer did not

provide full disclosure to her accountant because she did not tell her accountant that she was not

in the “armed forces”. The Department also argued that it was negligent for the Taxpayer to rely

on her accountant’s advice when the instructions for the 2011 and 2012 returns specified that

PHS was not entitled to the exemption. The Department argued that the accountant was not,

therefore, competent, and that reliance on an incompetent accountant could not excuse penalty.

The Taxpayer provided sufficient evidence to establish that she disclosed all of the facts

related to her active duty service with PHS. The accountant is the one who alerted the Taxpayer

to the exemption and advised her to take it. The accountant mistakenly believed that service in

the PHS was entitled to the exemption. The Taxpayer relied on the accountant’s advice. The

accountant erred in failing to review the PIT return instructions for 2011 and 2012, but an error

does not automatically and irretrievably strip an accountant of competence. The Taxpayer’s

accountant was reasonably competent and made a very interesting and nuanced argument to

support the Taxpayer’s position that her service in the PHS was actually service in the “armed

forces”. Although the Taxpayer’s accountant was ultimately found to be mistaken, the Taxpayer

was not unreasonable in relying on her accountant’s advice. Consequently, the Taxpayer was not

negligent. Therefore, penalty is abated pursuant to Regulation 3.1.11.11 NMAC.

Assessment of Interest.
Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 6 of 7
Interest “shall be paid” on taxes that are not paid on or before the date on which the tax is

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

mandatory, not discretionary. See Marbob Energy Corp. v. N.M. Oil Conservation Comm’n.,

2009-NMSC-013, ¶ 22, 146 N.M. 24. The assessment of interest is not designed to punish

taxpayers, but to compensate the state for the time value of unpaid revenues. Because the tax

was not paid when it was due, interest was properly assessed.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely written protests to the Notices of Assessment of 2009,

2010, 2011, and 2012 personal income taxes issued under Letter ID numbers L1229352400,

L1869522384, L0527345104, and L1601086928, and jurisdiction lies over the parties and the

subject matter of this protest.

2. The Taxpayer was not entitled to the “armed forces” exemption for her service in the

PHS. Therefore, the Taxpayer was properly assessed.

3. The Taxpayer reasonably relied upon the advice of her accountant when she claimed

the exemption. Therefore, the Taxpayer was not negligent, and penalty is ABATED.

For the foregoing reasons, the Taxpayer's protest is GRANTED in part and DENIED in

part.

DATED: December 5, 2014.

Dee Dee Hoxie
DEE DEE HOXIE
Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630
Kathleen Franklin
Letter ID Nos. L1869522384, L0527345104,
L1601086928, and L1229352400
page 7 of 7