Could Washington residents who adopted four New Mexico special-needs children claim New Mexico's $1,000-per-child refundable adoption credit?

Plain-English summary

Mark and Ikesha Owens could not claim New Mexico's refundable special-needs adoption credit because they were not New Mexico “taxpayers” under the statutes governing the credit. The Administrative Hearings Office upheld the denial of their requested $4,000 refund.

The Owens family lived in Vancouver, Washington. They became foster parents to four New Mexico children in 2016 and formally adopted them in July of that year. New Mexico's Children, Youth, and Families Department certified that each child met the statutory special-needs definition.

The family entered pre- and post-adoption agreements with New Mexico and received $29,036.40 during 2016. The payments included adoption-related attorney expenses, pre-adoption work-related child care, and payments connected with their licensed caregiving role. They completed required training and provided a Form W-9, but did not receive a Form 1099.

The Owens filed a 2016 New Mexico PIT-1, allocation schedule PIT-B, and rebate and credit schedule PIT-RC. They claimed the $1,000 refundable credit for each of four children under Section 7-2-18.16.

The Department adjusted the return and denied the refund. The first notice said only that there was a calculation error; a later letter explained that the Owens were not New Mexico taxpayers and had no income that could be allocated to the state.

The children met the special-needs requirement

The AHO found clear evidence that the Owens had adopted four children who qualified as special-needs adopted children. That element was not the problem.

The threshold language of Section 7-2-18.16 allowed the credit to a “taxpayer” who filed an individual New Mexico income tax return, was not another person's dependent, and adopted a qualifying child.

The Washington parents were not New Mexico taxpayers

The Tax Administration Act defined a taxpayer through liability for a tax administered by New Mexico, withholding or collection responsibility, an unpaid assessment, or an approved agreement assuming another person's tax liability. Federal taxes or taxes imposed elsewhere did not satisfy that definition.

The Income Tax Act defined a taxpayer as an individual subject to New Mexico income tax. It taxed residents and nonresidents engaged in business or employment in New Mexico or deriving income from property or employment within the state.

The Owens were not New Mexico residents, were not physically present in the state, and performed no employment or services there. The AHO held that fostering and adopting children was not a business enterprise. Adoption-assistance payments came from New Mexico, but the family activity occurred in Washington and did not make the parents subject to New Mexico income tax.

Because they did not meet either statutory taxpayer definition, they could not reach the refundable credit.

Ambiguous instructions did not expand the statute

The family relied on the Department's published instructions. The PIT-RC instructions said some basic qualifications, including residency and six months of physical presence, did not apply to the special-needs credit. They also lacked a clear method for nonresidents to allocate nontaxable adoption assistance.

The Department acknowledged that parts of the instructions were unclear. But the AHO held that forms and instructions could not grant a credit beyond the legislature's language.

The CYFD certifications added to the confusion. They told parents to attach the certificate when applying under Section 7-2-5.4, an older $2,500 exemption repealed in 2007. The current law instead provided a $1,000 refundable credit, and the related regulation had not been updated.

Those materials explained why the Owens reasonably believed they could apply, but did not make them statutory taxpayers.

The delayed explanation did not violate due process

The initial adjustment notice gave only a general calculation-error explanation. The Department supplied its detailed reasoning in a July 3, 2018 letter, more than a month after the protest.

That letter arrived before the hearing notice and well before the August 23 hearing. The Owens had time to prepare, attend, present evidence, cross-examine the Department's witness, and obtain an impartial ruling. The AHO therefore found no denial of due process.

Result: protest DENIED. The $4,000 special-needs adopted child tax credit refund remained disallowed.

What this means for you

Nonresidents considering New Mexico refundable credits

Filing a New Mexico return is not always enough. Check whether the credit's statute requires you to be a taxpayer subject to the underlying New Mexico tax act.

Adoptive parents receiving New Mexico assistance

Payments from a New Mexico agency do not automatically create New Mexico taxable activity when the care and household activity occur in another state.

Taxpayers relying on forms and instructions

Instructions can explain how to apply, but they cannot enlarge statutory eligibility. Compare the current statute with any certificate or form that cites an older provision.

Agencies administering adoption tax benefits

Outdated statutory references can create reasonable confusion. The CYFD certificates here still cited a repealed exemption rather than the current refundable credit.

Common questions

Q: Did the children qualify as special-needs adopted children?
A: Yes. CYFD certified all four children, and the AHO accepted that requirement as satisfied.

Q: How much credit did the Owens claim?
A: $4,000—$1,000 for each of four adopted children.

Q: Why didn't $29,036.40 of New Mexico assistance make them taxpayers?
A: The AHO found that adoption and parenting were not a business enterprise, the activity occurred in Washington, and the parents performed no employment or services within New Mexico.

Q: Did the Department's instructions appear to allow the filing?
A: They were ambiguous and did not clearly exclude this situation. But the AHO held that instructions alone could not create eligibility absent statutory authority.

Q: What was wrong with the CYFD certificate?
A: It referenced Section 7-2-5.4, a repealed $2,500 exemption, rather than the current $1,000 refundable credit in Section 7-2-18.16.

Q: Was the vague return-adjustment notice a due-process violation?
A: No. The Department later explained its reasoning early enough for the Owens to prepare and fully participate in the hearing.

Citations and references

Statutes and regulations:

• NMSA 1978, § 7-2-18.16 (2007) — $1,000 refundable special-needs adopted child tax credit
• NMSA 1978, §§ 7-1-3(AA) and 7-1-3(Y) (2015) — Tax Administration Act definitions of taxpayer and tax
• NMSA 1978, §§ 7-2-2(Z) and 7-2-3 — Income Tax Act taxpayer definition and persons subject to tax
• NMSA 1978, § 32A-5-44 — special-needs or difficult-to-place child certification
• NMSA 1978, § 9-11-6.2(G) — Department regulations, rulings, and instructions
• NMSA 1978, § 7-2-5.4 (repealed 2007) — former special-needs adoption exemption cited by CYFD
• Regulations 3.1.8.10 and 3.3.4.10 NMAC — burden to prove a credit and obsolete regulation for the former exemption

Cases cited:

• Team Specialty Products, Inc. v. New Mexico Taxation & Revenue Department, 2005-NMCA-020 — tax credits are narrowly construed and must be proved by the claimant
• City of Eunice v. State Taxation & Revenue Department, 2014-NMCA-085 — tax statutes should not be read to produce absurd or unreasonable results
• New Mexico Attorney General v. New Mexico Public Regulation Commission, 2013-NMSC-042 — agency statutory interpretations receive deference unless unreasonable or unlawful
• New Mexico Department of Workforce Solutions v. Garduño, 2016-NMSC-002 — adequate notice and meaningful opportunity to participate satisfy due process

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Mark A & Ikesha M Owens
• Decision PDF: D&O 18-43

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF D&O #18-43
MARK A. & IKESHA M. OWENS
TO RETURN ADJUSTMENT NOTICE ISSUED UNDER
LETTER ID NO. L1784380208

v. Case Number 18.07-159R

NEW MEXICO TAXATION AND REVENUE DEPARTMENT

DECISION AND ORDER

On August 23, 2018, Hearing Officer Ignacio V. Gallegos conducted a merits hearing in the matter

of the tax protest of Mark A. Owens and Ikesha M. Owens (“Taxpayers”) pursuant to the Tax

Administration Act and the Administrative Hearings Office Act. At the hearing, Mark A. Owens and

Ikesha M. Owens appeared representing themselves. Staff attorney Marek Grabowski, Esq., appeared

representing the opposing party in the protest, the Taxation and Revenue Department of the State of New

Mexico (“Department”).

Ikesha Owens was the sole witness for the Taxpayers. Protest auditor, Ms. Mary Griego, appeared

as a witness for the Department. Taxpayer’s Exhibits 1, 2, 3, 4 and 5 were admitted into the record without

objection. The Department’s Exhibits A and B were admitted without objection. The Hearing Officer took

administrative notice of all documents contained in the administrative file. All exhibits are more fully

described in the Administrative Exhibit Log.

The main issue presented before this tribunal in this protest is whether Mr. and Mrs. Owens are

“taxpayers” as contemplated by the Tax Administration Act and Income Tax Act. After making findings

of fact in this matter and discussing the arguments and the pertinent legal authority in more detail, this

tribunal ultimately concludes/rules that the Department prevails in this matter, as the Taxpayer was unable

to show either physical presence in New Mexico or substantial evidence of business activity within the

State of New Mexico. The hearing officer determines that Taxpayers are not “taxpayers” subject to the

In the Matter of Mark A. & Ikesha M. Owens, page 1 of 18
New Mexico Tax Administration Act and therefore are not entitled to receive the refundable credits for

which they applied.

FINDINGS OF FACT

1. On February 27, 2018, the Department issued a Return Adjustment Notice giving the

Taxpayers notice that there were changes made to their New Mexico Personal Income Tax return for tax

year ending December 31, 2016. [Taxpayer Ex. 1A, 1B; Letter ID# L1784380208].

2. The adjustments made by the Department, and noticed in the Return Adjustment Notice

letter made a change to line 39 “Overpayment” and specified as a reason for the adjustment that there was

a “Calculation error. Amount modified based on information in return.” [Taxpayer Ex. 1A, 1B; Letter ID#

L1784380208].

3. On May 22, 2018, Taxpayer sent a Formal Protest letter to the Department. [Administrative

File].

4. On May 29, 2018, the Department received the Taxpayer’s protest letter dated May 22

5. [Administrative File].

6. On June 11, 2018, the Department acknowledged Taxpayer’s protest. [Letter ID #

L0327757616; Administrative File].

6. On July 3, 2018, the Department sent Taxpayers a letter explaining the denial of refund.

The letter explained the Department’s position (later advocated at the hearing) that the Taxpayers are not

“taxpayers” as defined by the Tax Administration Act, and that they had no New Mexico income, therefore

apportionment was “statutorily prohibited.” The letter referenced the statutes, regulations, and a prior non-

precedential case before this tribunal. [Taxpayers’ Exhibit 5A and 5B].

7. On July 18, 2018, the Department submitted a Hearing Request to the Administrative

Hearings Office in which it requested a hearing on the merits of Taxpayer’s protest. [Administrative File].

In the Matter of Mark A. & Ikesha M. Owens
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8. On July 18, 2018, the Administrative Hearings Office issued a Notice of Administrative

Hearing that set a hearing on the merits of Taxpayer’s protest for August 23, 2018. [Administrative File].

9. On August 7, 2018, the Department submitted a Motion for Summary Judgment, which

included Exhibits A-001 through A-009 and B-001 through B-004. [Administrative File].

10. On August 23, 2018, a hearing was held at the Administrative Hearings Office, in the

Wendell Chino Building, Suite 269, in Santa Fe, New Mexico, a total of 73 days from when the protest was

acknowledged by the Department.

11. Taxpayers are a married couple who reside in Vancouver, Washington. [Department

Exhibits A and B; Administrative File].

12. Taxpayers became foster parents of four children from New Mexico in 2016. Taxpayers

formally adopted the four children from New Mexico in July of 2016. [Testimony of Mrs. Owens, Hearing

Record 08/23/18 (H.R.) 28:20-28:50, 48:50-49:20; Department Ex. B -001, B-002, B-003, and B-004].

13. In 2016, Taxpayers entered into two separate agreements with the State of New Mexico,

one that was in effect before the adoption, and one that was in effect after the adoption. The second

agreement, entitled “Adoption Assistance Agreement,” outlines the terms of the continued receipt of

monthly payments to Taxpayers for adoption assistance. [Testimony of Mrs. Owens, H.R. 25:50-27:20,

42:50-43:50, 1:01:50-1:01:30, 1:10:00-1:11:00, 1:16:00-1:17:00; Taxpayers Exhibits 4A, 4B, 4C, and 4D].

14. Taxpayers were required to undergo training by both the State of Washington and the State

of New Mexico to become caregiving “providers” before the adoption. Before receiving payments from

the State of New Mexico, Mrs. Owens was required to provide a Form W-9 to the State. The State did not

provide the Taxpayers with a form 1099 for miscellaneous income at the end of the year. [Testimony of

Mrs. Owens, H.R. 26:20-26:50, 42:50-43:50, 47:20-47:45, 58:50-59:30, 1:08:00-1:10:50, 1:23:00-

1:25:10].

In the Matter of Mark A. & Ikesha M. Owens
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15. Pursuant to the two agreements, Taxpayers received income from New Mexico sources in

2016, including payments for adoption-related attorney expenses, for work-related child care expense (prior

to adoption), and for their own services as care providers (#162868) licensed by the New Mexico Children,

Youth, and Families Department (CYFD). In total, Taxpayers received $29,036.40 in 2016 from the State

of New Mexico. [Testimony of Mrs. Owens, H.R. 25:50-27:00, 43:30-44:30, 59:10-59:30, 1:00:45-1:01:45,

1:16:00-1:19:40; Taxpayer Exhibit 2A; Taxpayer Ex. 3A, 3B].

16. The CYFD also certified that each of the four adoptive children met the State of New

Mexico’s definition of “special needs child” pursuant to NMSA 1978, Section 32A-5-44. Within the CYFD

certification document, there is a note to the parent stating: “For your information, should you choose to

apply for tax exemption under Section 7-2-5-4, NMSA 1978, a copy of this certification must accompany

your New Mexico Income Tax Return.” [Testimony of Mrs. Owens, H.R. 28:00-28:35; Testimony of Ms.

Griego, H.R. 1:45:00-1:47:00; Department Ex. B -001, B-002, B-003, and B-004].

17. The Taxpayers filed a 2016 Personal Income Tax Return (PIT-1) with the State of New

Mexico, including a Schedule of New Mexico Allocation and Apportionment of Income (PIT-B) and a

Rebate and Credit Schedule (PIT-RC) claiming a refund of $1,000.00 as tax credit for each of the four

adopted special needs children. [Taxpayer Ex. 2B, 2C; Department Ex. A-001 through A-009].

18. The Taxpayers relied upon Department’s publicly available instructions when completing

all New Mexico tax returns and schedules. The instructions for the Special Needs Adopted Child Tax

Credit do not specify any special record-keeping requirements, or require that the claimant be a New

Mexico Resident. The PIT-RC instructions provide no instruction or formula for calculating allocation or

apportionment of income for out-of-state residents. [Testimony of Mrs. Owens, H.R. 21:45-22:45, 24:20-

25:00, 50:30-52:25; see also Instructions for 2016 PIT-RC 1].

1
Available online: http://realfile.tax.newmexico.gov/2016pit-rc-ins.pdf

In the Matter of Mark A. & Ikesha M. Owens
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19. Taxpayers supplied the Department attorney previously working on the case (Kenneth

Fladager) with an amended PIT-RC to reflect the correct information, based on the Department’s July 3rd

letter explaining the “taxpayer” definition. [Testimony of Mrs. Owens, H.R. 43:30-46:00, 1:20:00-1:23:00;

Taxpayer Exhibit 2].

20. Taxpayers acknowledged that the PIT-RC as filed was inaccurate insofar as line 4 of

Section I should have been changed. Line 4 requires, as part of modified gross income, that the Taxpayers

report “all income of the taxpayer and household members, both taxable and nontaxable, and undiminished

by losses.” [Testimony of Mrs. Owens, H.R. 1:20:00-1:23:00; Department Exhibit A5].

21. Taxpayers indicated that the income received from New Mexico had been deemed

untaxable from the Federal perspective, pursuant to Internal Revenue Service Notice 2014-07 2, a Medicare

waiver of payments to care providers. For this reason, the Taxpayers listed payments from New Mexico as

“Other income” on the IRS form 1040. [Testimony of Mrs. Owens, H.R. 47:30-49:15, 1:11:00-1:12:30].

22. Ms. Mary Griego as a protest auditor with the Department reviewed the documents

associated with this case, and sought verification from the Internal Revenue Service (IRS) to confirm

Taxpayers’ income sources. [Testimony of Ms. Griego, H.R. 1:40:00 through 1:45:00].

23. The IRS documents Ms. Griego obtained consisted of W-2s and a Schedule C, which she

observed had no New Mexico-sourced income to go into Line 9 of the 2016 PIT-1. [Testimony of Ms.

Griego, H.R. 1:43:00-1:45:00].

24. Ms. Griego regarded the Taxpayers, by virtue her review of the documents, as not having

taxable income from New Mexico, or a tax liability in the State of New Mexico. [Testimony of Ms. Griego,

H.R. 1:42:40-1:45:00; Department Exhibit A-001 through A-009].

25. Ms. Griego indicated that there is no place in the PIT-B to report the type of non-taxable

earnings the Taxpayers have shown at the hearing. [Testimony of Ms. Griego, H.R. 1:57:00-01:58:00].

2
Available online at https://www.irs.gov/pub/irs-drop/n-14-07.pdf

In the Matter of Mark A. & Ikesha M. Owens
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26. Ms. Griego, until this case, was unaware of the fact that the PIT-B instructions promulgated

by the Department have no instruction on where to place non-taxable income if earned from New Mexico,

on the PIT-B form. [Testimony of Ms. Griego, H.R. 1:55:00-1:56:00, 2:00:00-2:03:00].

27. For guidance, Ms. Griego reviewed a hearing officer’s decision on a similar issue, Decision

number 13-38. The decision indicates when determining the applicability of the credit, allocation and

apportionment of the Special Needs Adopted Child Credit for out of state residents with New Mexico

income is appropriate. [Testimony of Ms. Griego, H.R.1:47:30-1:50:20, 2:04:15-30].

28. Ms. Griego indicated that when looking at New Mexico tax liability, her reference point is

the PIT-B, which is the allocation and apportionment of income schedule. [Testimony of Ms. Griego, H.R.

1:59:20-2:00:00].

29. Ms. Griego indicated that the PIT-RC is typically used by low-income filers. The entry of

“public assistance” as contemplated in line 7 of the PIT-RC, does not include child care payments made by

the State. [Testimony of Ms. Griego, H.R. 2:00:00-2:09:05].

DISCUSSION

Taxpayers are residents of the State of Washington who filed a New Mexico personal income tax

return in 2016. The Taxpayers filed Personal Income Tax returns in New Mexico, including the PIT-1, PIT-

B and PIT-RC, claiming a Special Needs Adopted Child Tax Credit for each of the four children they

adopted from New Mexico in 2016. The Department sent a return adjustment notice, effectively denying

the requested refund. Taxpayers protested this denial of claim for credit. At the hearing, two protested

issues remain: whether the Taxpayers are “taxpayers” under the statute, and whether the credit, if any,

should be apportioned based on the New Mexico-sourced income percentage revealed by Taxpayers.

In the Matter of Mark A. & Ikesha M. Owens
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Burden of Proof

The presumption of correctness under NMSA 1978, Section 7-1-17 (C) (2007) does not attach in

this matter because the Department did not issue an assessment under Section 7-1-17. Taxpayers

nevertheless have the burden to establish that they were entitled to their claim for credit pursuant to

Regulation 3.1.8.10 NMAC (08/30/2001) and must establish entitlement to the claimed refund. The denial

of Taxpayers’ claim for refund is viewed under the lens of a presumption of correctness. See Corr. Corp.

of Am. of Tenn. v. State, 2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779.

Tax credits are legislative grants of grace to a taxpayer that must be narrowly interpreted and

construed against a taxpayer. See Team Specialty Prods. v. N.M. Taxation & Revenue Dep’t, 2005-NMCA-

020, ¶9, 137 N.M. 50, 107 P.3d 4. Under the rationale of Team Specialty Prods, Taxpayers carry the burden

of proving that they are entitled to the claimed credit. Although a credit must be narrowly interpreted and

construed against a taxpayer, it still should be construed in a reasonable manner consistent with legislative

language. See Sec. Escrow Corp. v. State Taxation & Revenue Dep’t, 1988-NMCA-068, ¶9, 107 N.M. 540.

Consequently, Taxpayers must show that they are entitled to the refundable credit that is the basis of their

claim for refund, and that the Department acted in error in issuing the return adjustment denying the refund.

Special Needs Adopted Child Tax Credit.

The Special Needs Adopted Child Tax Credit is found under NMSA 1978, Section 7-2-18.16

(2007). Section 7-2-18.16 allows for a $1,000.00 refundable credit in each tax year for each eligible child.

The statute reads:

A. A taxpayer who files an individual New Mexico income tax return, who is not a dependent
of another individual and who adopts a special needs child on or after January 1, 2007 or has
adopted a special needs child prior to January 1, 2007, may claim a credit against the taxpayer’s
tax liability imposed pursuant to the Income Tax Act. The credit authorized pursuant to this
section may be referred to as the “special needs adopted child tax credit”.
B. A taxpayer may claim and the department may allow a special needs adopted child tax
credit in the amount of one thousand dollars ($1,000) to be claimed against the taxpayer’s tax
liability for the taxable year imposed pursuant to the Income Tax Act.
C. A taxpayer may claim a special needs adopted child tax credit for each year that the child
may be claimed as a dependent for federal taxation purposes by the taxpayer.

In the Matter of Mark A. & Ikesha M. Owens
Page 7 of 18
D. If the amount of the special needs adopted child tax credit due to the taxpayer exceeds the
taxpayer’s individual income tax liability, the excess shall be refunded.
E. A husband and wife who file separate returns for a taxable year in which they could have
filed a joint return may each claim only one-half of the special needs adopted child tax credit
provided in this section that would have been allowed on a joint return.
F. As used in this section, “special needs adopted child” means an individual who may be over
eighteen years of age and who is certified by the children, youth and families department or a
licensed child placement agency as meeting the definition of a “difficult to place child”
pursuant to the Adoption Act; provided, however, if the classification as a “difficult to place
child” is based on a physical or mental impairment or an emotional disturbance the physical or
mental impairment or emotional disturbance shall be at least moderately disabling.

Historically, the legislation that preceded the current statute was NMSA 1978, Section 7-1-5.4

(repealed 2007) 3. While the former statute was in effect, it was an exemption of $2,500.00, rather than a

refundable credit of $1,000.00 as it is currently. The CYFD certification issued to the Taxpayers upon

adoption of the children reflected the old statute that has been superceded by the current statute. The

regulation interpreting the former statute, Regulation 3.3.4.10 NMAC (12/14/00), has not been changed to

reflect that the exemption is now a refundable credit.

The evidence presented at the hearing is clear that Mark and Ikesha Owens adopted four children

from New Mexico who each qualified as “special needs” under the statute. The remaining questions are

first, whether Mark and Ikesha Owens are to be considered “taxpayers” and second, whether a refund, if

any, is to be apportioned according to New Mexico-based income.

3
Section 7-2-5.4. Exemption; adopted special needs child. [Repealed 2007.]
A. Any individual who has adopted a special needs child on or after January 1, 1988 may claim an exemption for
each such child in an amount specified in Subsection B of this section not to exceed two thousand five hundred
dollars ($2,500) of income includable, except for this exemption, in net income until the taxable year in which the
special needs child may no longer be claimed as a dependent for federal income tax purposes. Individuals having
income both within and without this state shall apportion this exemption in accordance with regulations of the
secretary.
B. For single individuals, heads of household and married individuals filing joint returns, for any taxable year
beginning on or after January 1, 1988, the amount of the exemption under this section shall be two thousand five
hundred dollars ($2,500). For married individuals filing separate returns, for any taxable year beginning on or after
January 1, 1988, the amount of the exemption under this section shall be one thousand two hundred fifty dollars
($1,250).
C. As used in this section, "special needs child" means an individual under eighteen years of age who is certified
by the human services department or a licensed child placement agency as meeting the definition of a "difficult to
place child" in Subsection B of Section 32A-5-44 NMSA 1978; provided, however, that no such classification shall
be based upon physical or mental handicap or emotional disturbance that is less than moderately disabling.

In the Matter of Mark A. & Ikesha M. Owens
Page 8 of 18
Are the protesting Taxpayers “taxpayers” under the Tax Administration Act?

In a written motion for summary judgment, and in closing arguments, the Department argued that

the Taxpayers in this case do not fit within the definition of “taxpayer” provided by NMSA 1978, Section

7-1-3 (AA). For purposes of clarity, Mark and Ikesha Owens throughout this decision and order are referred

to as “Taxpayers” or “Taxpayer”, with a capital “T”. Taxpayers, generally, as defined in the Tax

Administration Act, are referred to in this decision as “taxpayers” or “taxpayer” with a lower-case “t”. The

threshold question then is whether Taxpayers are “taxpayers.”

The New Mexico Tax Administration Act, NMSA 1978, Section 7-1-1 et seq., defines a “taxpayer.”

Because this protest pertains to the year 2016, we apply the statute that was in effect in 2016, although it

was amended slightly in 2017, yet the amendment would have no effect on this protest. NMSA 1978,

Section 7-1-3 (AA) (2015) defines “taxpayer” as “a person liable for payment of any tax; a person

responsible for withholding and payment or for collection and payment of any tax; a person to whom an

assessment has been made, if the assessment remains unabated or the amount thereof has not been paid; or

a person who entered into a special agreement to assume the liability of gross receipts tax or governmental

gross receipts tax of another person and the special agreement was approved by the secretary pursuant to

the Tax Administration Act.”

The Taxpayers in this case raised the issue that “any tax” could refer back to federal tax, or other

tax imposed by a governmental authority. The Department argued that “any tax” only refers to “tax” as

defined by the Tax Administration Act. The Tax Administration Act definition of “tax” in effect at the time

was “the total amount of each tax imposed and required to be paid, withheld and paid or collected and paid

under provision of any law made subject to administration and enforcement according to the provisions of

the Tax Administration Act and, unless the context otherwise requires, includes the amount of any interest

or civil penalty relating thereto; "tax" also means any amount of any abatement of tax made or any credit,

rebate or refund paid or credited by the department under any law subject to administration and enforcement

In the Matter of Mark A. & Ikesha M. Owens
Page 9 of 18
under the provisions of the Tax Administration Act to any person contrary to law and includes, unless the

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

Section 7-1-3 (Y) (2015). 4

“Any tax” as the Department rightly argued, has a built-in limitation to any tax “made subject to

administration and enforcement according to the provisions of the Tax Administration Act.” Despite the

common and broad meaning of “any” advocated by the Taxpayers, to interpret the statute in the extremely

broad manner Taxpayers have proposed would lead to overreaching beyond the state’s borders and

therefore would lead to an unintended result. “Tax statutes, like any other statutes, are to be interpreted in

accordance with the legislative intent and in a manner that will not render the statutes’ application absurd,

unreasonable, or unjust.” City of Eunice v. State Taxation & Revenue Dep't, 2014-NMCA-085, ¶8 (internal

citations and quotations emitted).

The next consideration, then, is the tax act at issue here, the New Mexico Income Tax Act, NMSA

1978, Section 7-2-1 et seq. The Income Tax Act also defines a “taxpayer”, but differently than the Tax

Administration Act. “‘Taxpayer’ means any individual subject to the tax imposed by the Income Tax Act.”

NMSA 1978, Section 7-2-2 (Z) (2014).

The Income Tax Act notably does not define “tax,” but does delineate who is subject to the Income

Tax Act. “A tax is imposed at the rates specified in the Income Tax Act upon the net income of every

resident individual and upon the net income of every nonresident individual employed or engaged in the

transaction of business in, into, or from this state, deriving any income from any property or employment

within this state.” NMSA 1978, Section 7-2-3 (1981).

It is undisputed that the Taxpayers are not New Mexico residents, so it is necessary to consider the

concept of “engaging in the transaction of business in, into, or from this state.” If Taxpayers were to fall

4
This statute was also slightly amended in 2017. Neither of the amendments made substantive changes to the
language analyzed in the case at hand.

In the Matter of Mark A. & Ikesha M. Owens
Page 10 of 18
into the purview of the Income Tax Act statute it would be necessary to fit their activity into the concept of

“business in, into, or from this state.” The question then would become, whether the State of New Mexico,

by requiring the Taxpayer to receive trainings, become certified in the care of disabled and special needs

children, and requiring the completion of a W-9 form, was treating the act of fostering and adoption akin

to a business enterprise. It should be noted that Taxpayers did not hint, suggest, or argue that the adoptions

constituted some sort of business, but their question of whether the state treated it as such is a necessary

question to answer because the Taxpayers were unsure how to account for their payments “from the state.”

By providing recompense to the foster parents and adoptive parents, and ensuring the children

reside in a home where the parents are capable of providing them with necessary care, the State of New

Mexico has benefitted from the activities of the adoptive parents. The state has given the Taxpayers income

as a result, and this income, even if not taxable, suggests that the State of New Mexico recognized the

activity to be valuable. However immeasurably valuable the activity is, raising children and adoption is

simply not a business enterprise. The children and the parents are the ultimate beneficiaries of the

specialized training, and profits are not measured in dollars but in more subtle and sometimes intangible

ways. The adoption assistance payments, although they are “from the state,” should not be considered

business activity.

Likewise, the second part of Section 7-2-3 requires “deriving any income from… employment

within this state.” The Taxpayers certainly derived income as a result of their activity, but the activity was

not “within this state.” In other contexts, New Mexico courts have acknowledged that “[t]he plain meaning

of ‘within this state’ is quite broad.” See State v. Johnson, 2001-NMSC-001, ¶7, 130 N.M. 6. Even given

the broad definition acknowledged in Johnson, the court generally acknowledged that the phrase referred

to the “interior of New Mexico.” Id. See also The protest of Jack & Karen Dill, Decision and Order #17-

42 (N.M. Admin. Hearings Office, October 5, 2017; non-precedential).

In the Matter of Mark A. & Ikesha M. Owens
Page 11 of 18
Because the Taxpayers were not residents of New Mexico, were not physically present in New

Mexico, and did not engage in business or income-generating activity within the state, under the Tax

Administration Act, and the Income Tax Act, Taxpayers are not “taxpayers” as defined in the Acts.

The effect of Department’s filing instructions.

At the hearing, the Taxpayers argued that the instructions for the PIT-1 and the PIT-RC led them

to believe they could apply for the credit. The Department conceded that some of the instructions are not

clear, but do not change the law. The Department indicated that the PIT-B is required for out-of-state filers

and the PIT-RC is generally intended for low-income filers within the state.

The instructions issued by the Secretary of the Taxation and Revenue Department are presumed to

be an accurate implementation of the law. NMSA 1978, Section 9-11-6.2 (G) indicates: “[a]ny regulation,

ruling, instruction or order issued by the secretary or delegate of the secretary is presumed to be a proper

implementation of the provisions of the laws that are charged to the department, the secretary, any division

of the department or any director of any division of the department.” The Department may interpret a tax

statute without adopting a rule or regulation related to that statute. See id. When an agency is charged with

the application of a statute, its construction is given some deference, but its construction will be disregarded

if its interpretation of the statute is found to be unreasonable or unlawful. See N.M. AG v. N.M. Pub.

Regulation Comm’n, 2013-NMSC-042, ¶ 12. Even if an agency’s interpretation of a statute should have

been codified under the State Rules Act, its interpretation is not void if it is a correct interpretation of the

law. See Dir., Labor & Indus. Div., N.M. DOL v. Echostar Communs. Corp., 2006-NMCA-047, ¶ 13-14,

139 N.M. 493. “[I]instructions … should be in ordinary, everyday language understood by the man or

woman on the street.” Davis v. N.M. State Bureau of Revenue, 1980-NMCA-153, ¶16, 620 P.2d 376, 95

N.M. 218.

In the Matter of Mark A. & Ikesha M. Owens
Page 12 of 18
Under the Personal Income Tax filing instructions, there are both required filers and permissive

filers. Instructions for the 2016 PIT-1 5 indicate that the people who must file a PIT-1 are “[e]very person

who is a New Mexico resident or has income from New Mexico sources” and “[e]very person who is

required to file a federal income tax return.” For non-residents, the instructions require “you must file in

New Mexico when both the following are true: You are required to file a federal return. You have income

from any New Mexico source whatsoever.” Under this standard, Mark and Ikesha Owens “must” file in

New Mexico, since the evidence shows that they are both required to file a federal return, and they have

income from a New Mexico source. The instruction does not require tax payment liability.

The same instructions make some taxpayers believe that filing is permissive, even without tax

liability: “Taxpayers not required to file a federal tax return with the IRS also are not required to file a New

Mexico Personal Income Tax return, BUT they may want to do so to claim certain rebates and credits for

low-income filers. You may also want to review Schedule PIT-RC and instructions to determine whether

you qualify for any of the low-income rebates and credits that may be claimed on that schedule” (emphasis

in original). The instructions give potential non-filers the encouragement to file to make a rebate or credit

claim.

The instructions to apply for the Special Needs Adopted Child Tax Credit appear in the 2016 PIT-

RC instructions 6. The instructions indicate that in order to claim the refundable tax credits, an applicant

does not need to meet the basic qualifications for Sections I through V of the PIT-RC. The basic

qualifications include four bullet points:

You must have been a resident of New Mexico during the tax year. You must have been
physically present in New Mexico for at least six months during the tax year (except to claim
the child day care credit). You were not eligible to be claimed as a dependent of another
taxpayer for the tax year. You were not an inmate of a public institution for more than six
months of the tax year.

5
Available online at http://realfile.tax.newmexico.gov/2016pit-1-ins.pdf
6
Available online at http://realfile.tax.newmexico.gov/2016pit-rc-ins.pdf

In the Matter of Mark A. & Ikesha M. Owens
Page 13 of 18
The plain language of the Departmental instructions then, by informing claimants that they need

not meet the basic qualifications, therefore allows people who were (1) not a resident, (2) not present in the

state, (3) were dependents, and (4) were incarcerated to make an application for the refundable credit. Yet,

the specific instruction for Section VI and Line 24, in particular, informs claimants that the requirements

are: “you file a New Mexico PIT-1 return, you are not a dependent of another taxpayer, you adopted a

special needs child, and you claimed the special needs adopted child as a dependent on your federal tax

return.” As the Taxpayers pointed out, and the Department agreed, the instructions do not make clear who

cannot file, aside from these qualifications, and also do not include any instruction for non-resident

individuals as to how or whether to allocate and apportion income to receive a reduced credit.

The PIT-1 instructions inform taxpayers that “[d]epending on your residency status and your

personal situation, other forms and schedules may also be necessary to attach to and file with your PIT-1.”

Among those additional forms and schedules is the PIT-B “[t]o allocate and apportion income received

from employment, business, or property sources located inside and outside New Mexico, file PIT-B,

Schedule of New Mexico Allocation and Apportionment of Income.” The Taxpayers also filled out the

2016 PIT-B when completing their return.

Department’s 2016 PIT-B instructions 7, in Line 1 explains, “[o]nly if wages were earned in New

Mexico, do non-residents allocate income from line 1 to New Mexico” (emphasis added). The instructions

go on to provide for Column 2 of Line 1 that non-residents “[e]nter the part of column 1 that came from

services performed in New Mexico” (emphasis added). Since the Taxpayers here did not have wages or

perform services “in” New Mexico, their income as non-residents was not to be allocated or apportioned to

New Mexico, although some income came from a New Mexico source. The Taxpayer’s contention that

New Mexico allows allocation of income earned elsewhere to New Mexico is simply not borne out by the

Department’s instructions.

7
Available online at http://realfile.tax.newmexico.gov/2016pit-b-ins.pdf

In the Matter of Mark A. & Ikesha M. Owens
Page 14 of 18
Mark and Ikesha Owens filed their PIT-1 and PIT-RC forms according to instructions published

and promulgated by the Department. Nevertheless, simply following the Department’s filing instructions

does not guarantee that the credit will be granted. When an agency is charged with the application of a

statute, its construction is given some deference, but its construction will be disregarded if its interpretation

of the statute is found to be unreasonable or unlawful. See N.M. AG v. N.M. Pub. Regulation Comm’n,

2013-NMSC-042, ¶ 12. The Department’s instructions simply do not account for the special instance seen

here of individuals from outside New Mexico, with no New Mexico presence, and with no employment

within New Mexico, who receive non-taxable income from the state and who have graciously fostered and

adopted New Mexico children, and who wish to be subject to New Mexico tax laws. It is quite the reverse

of most out-of-state tax protestants, who wish not to be subject to New Mexico tax laws. See generally The

protest of Jack & Karen Dill, Decision and Order #17-42 (N.M. Admin. Hearings Office, October 5, 2017;

non-precedential); A&W Restaurants, Inc. v. Taxation and Revenue Dep’t., 2018-NMCA-069; see also

Kmart Props, Inc., v. Taxation and Revenue Dep’t., 2006- NMCA-026, 139 N.M. 177. Despite the fact

that the Taxpayers filled out their tax returns according to the instructions promulgated by the Department,

the Department’s instructions alone, even giving due deference, simply do not create access to the credits

the Taxpayers seek, without the will of the legislature to provide the credits to persons other than New

Mexico “taxpayers.” As stated above, the broad interpretation proposed by the Taxpayers in order to fit

their tangential New Mexico connection into the definition of “taxpayer” simply does not bear the weight

of sound reasoning.

Due Process

Taxpayers raised the argument that the Department did not afford them adequate notice of the

reason for the denial of the refundable credit in a timely fashion. See Garcia ex rel. Garcia v. LaFarge,

1995-NMSC-019, 119 N.M. 532, 893 P.2d 428 (“Although [the] plaintiffs’ due process arguments were

not a model of clarity, and certainly could have been made with more specificity, they were sufficient to

In the Matter of Mark A. & Ikesha M. Owens
Page 15 of 18
alert the trial court and opposing counsel to the substance of the argument being made”) (Partially overruled

on other grounds by Cahn v. Berryman, 2018-NMSC-002); accord State v. Figueroa, 2010-NMCA-048,

242 P.3d 378, 148 N.M. 811 (cert. granted 148 N.M. 584). Under New Mexico law, “[p]roperty interests

are created and their dimensions are defined by existing rules or understandings that stem from an

independent source such as state law—rules or understandings that secure certain benefits and that support

claims of entitlement to those benefits.” N.M. Dep’t. of Workforce Solutions v. Garduño, 2016-NMSC-002,

¶13. Here, a properly enacted statute gave rise to a refundable credit, and the CYFD certificates (Exhibit

B1-4) gave rise to a reasonable belief that the statute applied to these adoptive parents.

The property interest in obtaining a refundable credit is a protectable right. Taxpayers’ contention

challenges the keystones of the administrative process: notice and an opportunity to be heard. The challenge

stems from the perceived tardiness of the Department in giving a rationale for the refund denial. The

rationale for the Department’s action came in the form of a letter sent by the protest auditor, dated July 3,

2018, which was more than a month after the Taxpayers sent their formal protest letter questioning the

perfunctory and not at all enlightening Return Adjustment Notice. The July 3, 2018 letter explained the

Department auditor’s reasoning in denying the credit, and was sent to Taxpayers before the Administrative

Hearings Office sent notice of the administrative hearing, and well before the hearing took place on August

23, 2018. The Taxpayers had an opportunity to prepare their case, address the Department’s contentions,

attend the hearing, cross-examine the Department’s witnesses, and seek rulings from the impartial Hearing

Officer, and they did so. The Taxpayers were not denied due process of law. Garduño, 2016-NMSC-002,

¶ 32-33 (Applicant not prejudiced by late notice as long as notice was not affirmatively misleading, and

applicant was able to prepare and participate in the hearing).

In the Matter of Mark A. & Ikesha M. Owens
Page 16 of 18
CONCLUSIONS OF LAW

A. Taxpayer filed a timely written protest to the return adjustment notice showing a denial of

refund issued by the Department, dated February 27, 2018, and jurisdiction lies over the parties and the

subject matter of this protest.

B. The Administrative Hearings Office held a hearing August 23, 2018, within the 90-day

hearing requirement provided in NMSA 1978, Section, 7-1B-8 (A) and Regulation 22.600.3.8 (E).

C. Pursuant to Team Specialty Prods. v. N.M. Taxation & Revenue Dep’t, 2005-NMCA-020,

¶9, 137 N.M. 50, 107 P.3d 4, it is Taxpayer’s burden to come forward with evidence and legal argument to

establish entitlement to the credit.

D. Taxpayers were unable to establish that the activity of fostering and adopting children from

New Mexico was income-generating activity within the state to validate the claim that they are “taxpayers”

as defined under the Tax Administration Act and the Income Tax Act. See NMSA 1978, Section 7-1-3

(AA) (2015) and Section 7-2-2 (Z) (2014).

For the foregoing reasons, Taxpayer’s protest DENIED.

Dated: December 21, 2018.

Ignacio V. Gallegos
Hearing Officer
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (2015), the parties have the right to appeal this decision

In the Matter of Mark A. & Ikesha M. Owens
Page 17 of 18
by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the date shown above.

If an appeal is not timely filed with the Court of Appeals within 30 days, this Decision and Order will

become final. Rule of Appellate Procedure 12-601 NMRA articulates the requirements of perfecting an

appeal of an administrative decision with the Court of Appeals. Either party filing an appeal shall file a

courtesy copy of the appeal with the Administrative Hearings Office contemporaneous with the Court of

Appeals filing so that the Administrative Hearings Office may begin preparing the record proper. The

parties will each be provided with a copy of the record proper at the time of the filing of the record proper

with the Court of Appeals, which occurs within 14-days of the Administrative Hearings Office receipt of

the docketing statement from the appealing party. See Rule 12-209 NMRA.

CERTIFICATE OF SERVICE

I hereby certify that I mailed the foregoing Decision and Order to the parties listed below this 21st

day of December, 2018 in the following manner:

First Class Mail Interdepartmental State Mail

INTENTIONALLY BLANK

John D. Griego
Legal Assistant
Administrative Hearings Office
Post Office Box 6400
Santa Fe, NM 87502
PH: (505)827-0466
FX: (505)827-9732
[email protected]

In the Matter of Mark A. & Ikesha M. Owens
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