Can New Mexico residents both allocate Arkansas pass-through income outside New Mexico and claim a credit for Arkansas tax paid on that same income?

Plain-English summary

New Mexico residents could not receive two credits for the same Arkansas income. Dennis and Kerry Miller first allocated their Arkansas LLC income outside New Mexico on Form PIT-B, which already reduced New Mexico tax. They could not also claim a credit for the Arkansas tax paid on that income.

The Millers lived in Albuquerque and co-owned an Arkansas LLC holding land with advertising billboards. In 2018, the LLC earned billboard-rental income and recognized capital gain when Arkansas real property was sold through an eminent-domain purchase. A CPA prepared the LLC return and issued Dennis Miller a Schedule K-1; Miller then used TurboTax for the federal, Arkansas, and New Mexico individual returns.

On New Mexico Form PIT-B, the Millers allocated both the Arkansas real-estate gain and billboard income to Arkansas. Their New Mexico percentage was 46.9809%, leaving 53.0191% as the non-New Mexico percentage. Applying Section 7-2-11 reduced the tax from what would have been $10,023 on all income to the New Mexico share, giving a $5,314 allocation credit.

They also claimed a separate $4,514 credit for tax paid to Arkansas under Section 7-2-13. The Department disallowed that second credit and denied the related refund.

Section 7-2-13 applies when income taxed by another state is also included as income allocated or apportioned to New Mexico. That prevents two states from taxing the same income. Here, however, the LLC income had already been allocated entirely to Arkansas and removed from the New Mexico tax base through the PIT-B calculation. It was not income allocated to New Mexico.

Granting the second credit would have duplicated the relief: New Mexico would first decline to tax the Arkansas income and then credit the Arkansas tax against the remaining New Mexico tax. The ruling described that result as effectively subsidizing the tax payment to another state.

TurboTax did not change the outcome. Miller credibly relied on the off-the-shelf software, but it was not a New Mexico CPA or attorney, and tax-preparation software is not a defense to negligence penalties.

The Return Adjustment Notice showed $4,709 of tax, $28.28 of penalty, and $0.74 of interest, reduced by a $4,409.71 credit, for a $328.31 proposed assessment. The Millers had already paid that amount.

Result: protest DENIED. The refund denial and proposed assessment were correct, and nothing further was due because payment had already been made.

What this means for you

Allocation and other-state tax credits solve different problems

Allocation removes income from New Mexico's tax base based on where it belongs. The other-state credit applies when income remains allocated or apportioned to New Mexico but another state also taxes it.

Do not claim both benefits on the same excluded income

Once income is allocated entirely outside New Mexico and reduces the New Mexico tax calculation, tax paid to that other state does not create an additional New Mexico credit for the same income.

Trace pass-through items by source

Schedule K-1 rental and capital-gain items may need separate sourcing on PIT-B based on the location of the property and income-producing activity.

Review software outputs for duplicate state benefits

Tax software depends on the entries and logic applied. A completed return can still claim mutually inconsistent state treatments, and software reliance alone may not remove penalty.

Common questions

Q: What Arkansas income was involved?
A: Billboard-rental income and capital gain from an eminent-domain sale of Arkansas real estate owned by the family LLC.

Q: Did New Mexico tax the Arkansas income after PIT-B allocation?
A: No. The 53.0191% non-New Mexico percentage reduced the New Mexico tax by $5,314.

Q: When can Section 7-2-13 provide an other-state credit?
A: When income taxed by the other state is also allocated or apportioned to New Mexico, subject to the statutory limit. The Arkansas items here were not.

Q: Why was the $4,514 credit denied?
A: It would have duplicated the benefit already received by allocating the same income outside New Mexico.

Q: Did the Millers owe anything after the decision?
A: No additional amount. The $328.31 proposed assessment was upheld, but they had already paid it.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-2-3 and 7-2-7 — personal income tax and tax calculation
• NMSA 1978, § 7-2-11(B) — allocation and apportionment credit based on the non-New Mexico percentage
• NMSA 1978, § 7-2-13 (2013) — credit for income tax paid to another state on income also allocated or apportioned to New Mexico
• NMSA 1978, § 7-1-69(B) (2007) — good-faith mistake-of-law penalty relief
• Regulation 3.1.8.10 NMAC — burden to establish a refund after denial
• Regulation 3.1.11.11 NMAC — grounds for non-negligence
• Regulations 3.3.11.12 and 3.3.11.13(B) NMAC — examples of resident income allocated to New Mexico

Cases:

• Team Specialty Products v. New Mexico Taxation and Revenue Department, 2005-NMCA-020 — tax credits are legislative grants narrowly construed against the taxpayer
• Corrections Corp. of America v. State of New Mexico, 2007-NMCA-148 — refund-denial presumption and taxpayer's burden
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — evidence required to overcome a tax presumption

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Dennis Miller
• Decision PDF: D&O 20-07

Original ruling text

1 STATE OF NEW MEXICO
2 ADMINISTRATIVE HEARINGS OFFICE
3 TAX ADMINISTRATION ACT

4 IN THE MATTER OF THE PROTEST OF
5 DENNIS MILLER
6 TO RETURN ADJUSTMENT NOTICE ISSUED UNDER
7 LETTER ID NO. L0479945904 Case Number 20.01-001R
8 v. Decision and Order No. 20-07
9 NEW MEXICO TAXATION AND REVENUE DEPARTMENT

10 DECISION AND ORDER

11 On February 6, 2020, Hearing Officer Ignacio V. Gallegos, Esq., conducted a merits

12 administrative hearing in the matter of the tax protest of Dennis Miller (“Taxpayer”) pursuant to

13 the Tax Administration Act and the Administrative Hearings Office Act. At the hearing, Mr.

14 Dennis Miller appeared representing himself, accompanied by his spouse Mrs. Kerry Miller

15 (collectively “Taxpayers”). Mr. Miller was Taxpayer’s sole witness. Staff Attorney Kenneth

16 Fladager appeared, representing the opposing party in the protest, the Taxation and Revenue

17 Department (“Department”). Department protest auditor Alma Lucero appeared as a witness for

18 the Department. Mr. Miller’s testimony was highly credible. Taxpayer did not offer formal

19 exhibits but had supplied the documents he relied on to the Department, which had been included

20 in the Administrative File. Taxpayer supplied no additional exhibits, as he had provided the

21 Department with the substantive documents earlier and those were already part of the

22 administrative file. Department offered Exhibits A and B. All exhibits were admitted into the

23 record. The administrative file is considered part of the record.

24 In quick summary, this protest involves a denial of refund claim based on taxes paid to

25 another state. Taxpayer paid income tax in the states of New Mexico and Arkansas and used

26 TurboTax for income tax reporting. Department denied the claim for refund for taxes because

27 Taxpayer’s income had already been allocated and apportioned among the two states before tax was

In the Matter of the Dennis Miller, page 1 of 15.
1 calculated, hence no additional credit was due. Ultimately, after making findings of fact and

2 discussing the issue in more detail throughout this decision, the hearing officer finds that Taxpayer’s

3 protest must be denied. The denial of refund was proper. IT IS DECIDED AND ORDERED AS

4 FOLLOWS:

5 FINDINGS OF FACT

6 Procedural Findings

7 1. On April 30, 2019, under Letter Id. No. L0479945904, the Department issued a

8 Return Adjustment Notice (proposed assessment), indicating that Taxpayer’s refund request was

9 denied by adjusting Line 20 and Line 30 of Taxpayer’s 2018 Personal Income Tax return. The

10 letter indicated that Taxpayer owed tax of $4,709.00, penalty of $28.28, and interest of $0.74,

11 with a credit of $4,409.71, for a total proposed assessment of $328.31 for tax reporting period

12 from January 1, 2018 to December 31, 2018. [Administrative File].

13 2. On July 29, 2019, Taxpayer submitted a protest letter, challenging the assessment,

14 alleging that Taxpayer had followed instructions from the tax preparation program TurboTax

15 when reporting income. The protest letter was stamped as received by the Department Protest

16 Office on August 1, 2019. Taxpayer provided additional supporting documentation consisting of

17 Taxpayers’ 2018 Arkansas personal income tax return, Taxpayers’ 2018 New Mexico personal

18 income tax return, Taxpayers’ 2018 IRS Form 1040 personal income tax return, as well as

19 estimated tax payment vouchers for 2018 and 2019. [Administrative File].

20 3. On August 6, 2019, under Letter Id. No. L1068453040 the Department issued a

21 letter acknowledging receipt of Taxpayer’s protest. [Administrative File].

In the Matter of the Dennis Miller, page 2 of 15.
1 4. On January 6, 2020, the Department, through Attorney Kenneth Fladager,

2 submitted a Request for Hearing to the Administrative Hearings Office, requesting a scheduling

3 hearing on Taxpayer’s protest. [Administrative File].

4 5. On January 6, 2020, the Department, through Attorney Kenneth Fladager, timely

5 submitted the Department’s Answer to Protest to the Administrative Hearings Office.

6 [Administrative File].

7 6. On January 6, 2020, the Administrative Hearings Office sent a Notice of

8 Administrative Hearing in Albuquerque to the parties, informing them of the scheduled merits

9 hearing to take place on February 6, 2020 at the Administrative Hearings Office in Albuquerque,

10 New Mexico. [Administrative File].

11 7. The undersigned Administrative Hearing Officer Ignacio V. Gallegos conducted

12 the merits hearing on February 6, 2020 with the parties present at the Administrative Hearings

13 Office in the Compass Bank Building in Albuquerque, New Mexico. Neither the Department

14 nor Taxpayer objected that conducting the hearing satisfied the 90-day hearing requirements of

15 Section 7-1B-8 (F) (2019). The Administrative Hearings Officer preserved a recording of the

16 hearing (“Hearing Record” or “H.R.”). [Administrative File].

17 Substantive Findings

18 8. Taxpayers Dennis Miller and spouse Kerry Miller are individuals residing in

19 Albuquerque, New Mexico. [Administrative File, Direct examination of Dennis Miller,

20 H.R.16:00-16:20; 27:50-28:20].

In the Matter of the Dennis Miller, page 3 of 15.
1 9. Alma Lucero is the tax auditor assigned to the protest. She has been a

2 Department tax auditor for less than one year. [Direct examination of Alma Lucero, H.R. 47:40-

3 48:05].

4 10. Mr. Dennis Miller is a retired engineer. Mr. Miller is not a trained accountant nor

5 has a background in New Mexico tax law. [Administrative File, Direct examination of Dennis

6 Miller, H.R.16:00-16:25; Cross examination of Dennis Miller, H.R. 41:10-41:15].

7 11. Mr. Miller utilized TurboTax to help him submit 2018 tax returns to the Federal

8 Internal Revenue Service (IRS), the State of New Mexico, and the State of Arkansas. TurboTax

9 is an off-the-shelf tax preparation program. TurboTax is not a New Mexico Certified Public

10 Accountant (CPA) or an attorney. Mr. Miller relied on the software to correctly fill in his tax

11 returns, after he provided input data. [Administrative File; Direct examination of Dennis Miller,

12 H.R. 10:10-10:30; Cross examination of Dennis Miller, H.R. 41:10-41:45; Department Exhibit

13 A; Department Exhibit B].

14 12. Mr. Miller and family members co-own a limited liability corporation (LLC)

15 which does business in Arkansas. The LLC owns land upon which advertising billboards are

16 located, producing rental income. In 2018, the LLC sold real estate property as a result of an

17 eminent domain purchase, resulting in capital gains income. A CPA completed the LLC’s tax

18 returns and provided Mr. Miller, as an owner, a Schedule K-1. [Administrative File, Direct

19 examination of Dennis Miller, H.R. 17:00-18:00; Cross examination of Dennis Miller, H.R.

20 41:50-43:00; AHO examination of Dennis Miller, H.R. 43:45-45:50].

21 13. Taxpayer allocated the LLC’s income from the Arkansas billboard rental and the

22 income from the capital gains from his Schedule K-1 on the New Mexico PIT-B. Line 5, Column

23 1 of the PIT-B reflects the combined capital gain income from the LLC and other investments.

In the Matter of the Dennis Miller, page 4 of 15.
1 Line 5, Column 2 reflects the New Mexico portion of the capital gain income, from other

2 investments. The difference between the two columns reflects Taxpayer’s share of the sale of

3 the LLC’s real estate in Arkansas. Line 6, Column 1 reflects the billboard rental income. The

4 New Mexico percentage of income is calculated on Line 12 and amounts to 46.9809% of total

5 income reported on Line 11. Line 13 reflects the total New Mexico tax, including both the New

6 Mexico percentage and the non-New Mexico percentage. Line 14 reflects the New Mexico tax

7 on the New Mexico percentage of income. Line 14 is repeated on Line 18 of the PIT-1.

8 [Administrative File (i.e., IRS Form 4797, p. 73 of 141, Schedule K-1, p. 108-111 of 141); Direct

9 examination of Dennis Miller, H.R. 22:00-23:20; AHO examination of Dennis Miller, H.R.

10 43:45-46:45; Direct examination of Alma Lucero, H.R. 49:45-53:25; Department Exhibit B-004,

11 B-001].

12 14. Taxpayer, when prompted by TurboTax, completed the worksheet and requested

13 credit for taxes paid to the State of Arkansas, in the amount of $4,514. [Administrative File;

14 Direct examination of Dennis Miller, HR 27:50-31:25; Department Exhibit B-001].

15 15. Taxpayer relied on calculations of TurboTax, which computed an overpayment of

16 New Mexico tax, and requested a refund. [Administrative File; Direct examination of Dennis

17 Miller, H.R. 31:50-34:10; Department Exhibit B].

18 16. Taxpayer acknowledged that he misstated the estimated tax overpayment, because

19 when he realized he would be overpaying he modified his estimated payment. The tax software

20 utilized by the Department indicated that Taxpayer made estimated payments totaling $3,761.00.

21 Mr. Miller forgot to update TurboTax to reflect the reduced estimated payment amount.

22 [Administrative File; Direct examination of Dennis Miller, H.R. 36:10-39:50; Direct

23 examination of Alma Lucero, H.R. 48:50-49:45].

In the Matter of the Dennis Miller, page 5 of 15.
1 17. The TurboTax program did not alert Mr. Miller to any errors in claiming the

2 credit for taxes paid to another state. [Administrative File; Direct examination of Dennis Miller,

3 H.R. 40:30-41:00].

4 18. The Department disallowed credit for tax payments to Arkansas because the

5 income was already allocated to Arkansas and denied the refund request. [Administrative File;

6 Letter ID # L0479945904; Direct examination of Alma Lucero, H.R. 49:45-53:25; Department

7 Exhibit B-004].

8 19. Mr. Miller paid $335.79 since receiving the return adjustment and proposed

9 assessment. [Direct examination of Dennis Miller, H.R. 39:50-40:10; Direct examination of

10 Alma Lucero, H.R. 39:50-40:10].

11 DISCUSSION

12 Taxpayers’ protest involves a denial of Taxpayer’s 2018 personal income tax refund request.

13 Taxpayer requested a refund after paying estimated taxes to the State of New Mexico, and after

14 applying a credit he believed was applicable for income taxes he paid to the State of Arkansas.

15 Income was allocated between New Mexico and Arkansas. The question presented is whether Mr.

16 Miller may receive a credit for taxes paid to another state for income taxes when the income has

17 already been allocated between the two states in which taxes were paid.

18 New Mexico personal income tax is governed by the Income Tax Act, NMSA 1978,

19 Sections 7-2-1 through 7-2-39. It is undisputed that Mr. and Mrs. Miller were New Mexico residents

20 during the 2018 tax year, and the Income Tax Act applies to their income. See Section 7-2-2 (S)

21 (2014). The answer to the question presented requires analysis of Section 7-2-11 (2016) which

22 grants a credit for taxes on the non-New Mexico percentage of income tax and Section 7-2-13

23 (2013) which grants a credit for tax paid to another state.

In the Matter of the Dennis Miller, page 6 of 15.
1 Presumption of correctness

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

3 strictly attach in this matter because the protest does not stem from the issuance of an assessment

4 under Section 7-1-17. Taxpayers nevertheless have the burden to establish that they were

5 entitled to their claim for credit pursuant to Regulation §3.1.8.10 NMAC (08/30/2001) and must

6 establish entitlement to the claimed refund. The denial of Taxpayers’ claim for refund is viewed

7 under the lens of a presumption of correctness. See Corr. Corp. of Am. of Tenn. v. State, 2007-

8 NMCA-148, ¶17 & ¶29, 142 N.M. 779.

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

10 and construed against a taxpayer. See Team Specialty Prods. v. N.M. Taxation & Revenue Dep’t,

11 2005-NMCA-020, ¶9, 137 N.M. 50, 107 P.3d 4. Under the rationale of Team Specialty Prods,

12 Taxpayers carry the burden of proving that they are entitled to the claimed credit. Although a

13 credit must be narrowly interpreted and construed against a taxpayer, it still should be construed

14 in a reasonable manner consistent with legislative language. See Sec. Escrow Corp. v. State

15 Taxation & Revenue Dep’t, 1988-NMCA-068, ¶9, 107 N.M. 540. Consequently, Taxpayers

16 must show that they are entitled to the credit that is the basis of their claim for refund, and that

17 the Department acted in error in issuing the return adjustment denying the refund and denying

18 one of the two credits at issue.

19 Credit granted by allocation and apportionment of income under Section 7-2-11.

20 New Mexico taxes the net income of every resident individual and certain non-resident

21 individuals. See NMSA 1978, Section 7-2-3 (1981). The tax bracket a taxpayer fits into is based on

22 a taxpayer’s taxable income. See NMSA 1978, Section 7-2-7 (2005). When a taxpayer has income

23 that is taxable both within New Mexico and outside of New Mexico, Section 7-2-11 allows that

In the Matter of the Dennis Miller, page 7 of 15.
1 taxpayer to allocate and apportion certain categories of income between New Mexico and the other

2 state or states. The application of this credit serves to reduce the tax imposed under Section 7-2-7

3 by the percentage of net income sourced from out of state (the non-New Mexico percentage), with

4 some exclusions (i.e., wages and retirement income). See Section 7-2-11 (B). The 2018 Personal

5 Income Tax (PIT-1) instructions 1 require taxpayers who claim this credit for non-New Mexico

6 income to file the PIT-B form.

7 Dennis Miller is a New Mexico resident and an individual. He owns a share of an LLC in

8 Arkansas which is a pass-through business entity. Although none of the corporate documents were

9 entered into evidence, the Schedule K-1 was included in the hearing packet along with the Form

10 4797 for Sale of Business Property, indicating this is a pass-through entity. During the 2018 tax

11 year, the LLC had two sorts of income. The first sort was rental income from being in the business

12 of providing roadside billboards located in Arkansas. The second sort was a long-term capital gain

13 from the sale (by eminent domain) of real estate located in Arkansas. Both of those items of income

14 were wholly achieved in the State of Arkansas. Mr. Miller filed an Arkansas non-resident personal

15 income tax return reporting the income in Arkansas, allocating the entire capital gain income and

16 the total rental income to the State of Arkansas, and he paid taxes to the State of Arkansas. Because

17 Taxpayer is an individual, not a business, the income is allocated to the State of Arkansas as

18 nonbusiness income.

19 Taxpayers filed a joint Personal Income Tax return with the State of New Mexico, as is

20 required for state residents. Taxpayer completed the 2018 PIT-B New Mexico Allocation and

1
2018 PIT-1 instructions are published and available on the Department’s forms and publications website:
www.tax.newmexico.gov/forms-publications.aspx. In particular, see https://s3.amazonaws.com/realFile34821a95-
73ca-43e7-b06d-fad20f5183fd/a0278373-9d7d-4ec7-ac7a-c4d879d6f796?response-content-
disposition=filename%3D%222018pit-1-ins.pdf%22&response-content-
type=application%2Fpdf&AWSAccessKeyId=AKIAJBI25DHBYGD7I7TA&Signature=6ta%2F%2BzblpX1G58Pf
fa0bT0NDcvI%3D&Expires=1585850588 (last accessed 4/02/2020).

In the Matter of the Dennis Miller, page 8 of 15.
1 Apportionment schedule. The PIT-B reports no business or farm income on Line 8, showing

2 Taxpayer considered the income at issue nonbusiness income, not requiring apportionment. Line 5

3 shows the capital gain income. The PIT-B instructions require “[a]ll taxpayers with income from

4 the sale or exchange of property allocate and apportion the income or loss on line 5, column 1,

5 based on the location of the income-earning property or activity.” The line 5, column 1, entry

6 reflects the income from the sale of Arkansas real estate property. Column 2 excludes the income

7 allocated to Arkansas. This was proper.

8 Line 6 then requires ordinary income of pass-through entities to be reported. On Line 6,

9 column 1, Taxpayer placed the income from the LLC’s billboard rentals. The PIT-B instructions 2

10 require taxpayers to “[a]llocate distributions of ordinary income (losses) to partners, members or

11 owners of partnerships, limited liability companies, and Sub-Chapter S corporations, based on

12 where the income-producing activities occur.” The allocation of rental income to Arkansas was

13 proper.

14 Taxpayers reported Federal adjusted gross income of $349,112 (line 9 of PIT-1). New

15 Mexico taxable income was reported to be $212,922 (line 17 of PIT-1). On the PIT- B, Taxpayers

16 calculated that the New Mexico income was $164,016 (line 9, column 2, PIT-B). The calculation

17 for the New Mexico percentage of income resulted in a New Mexico percentage of 46.9809 percent.

18 The non-New Mexico percentage therefore was 53.0191 percent. If New Mexico taxed the entire

19 income of these Taxpayers, using the tax rate tables, the total tax would be $10,023 (line 13, PIT-B).

2
2018 PIT-B instructions are published and available on the Department’s forms and publications website:
www.tax.newmexico.gov/forms-publications.aspx. In particular, see https://s3.amazonaws.com/realFile34821a95-
73ca-43e7-b06d-fad20f5183fd/341427aa-f0df-4353-b9a0-4fa54c9d3b52?response-content-
disposition=filename%3D%222018pit-b-ins.pdf%22&response-content-
type=application%2Fpdf&AWSAccessKeyId=AKIAJBI25DHBYGD7I7TA&Signature=gPmqkNDcl09WCgzrti24q
vzrYPs%3D&Expires=1586447958 (last accessed 4/09/2020).

In the Matter of the Dennis Miller, page 9 of 15.
1 Instead, because the tax from income out of state was credited, the tax imposed was only the New

2 Mexico percentage of $10,023, which calculated to $4,709.00 (line 14, PIT-B).

3 This comports to NMSA 1978, Section 7-2-11(B) and (C) (2016). After allocation and

4 apportionment, the law allows “[a] taxpayer may claim a credit in an amount equal to the amount of

5 tax determined to be due under Section 7-2-7 or 7-2-7.1 NMSA 1978 multiplied by the non-New

6 Mexico percentage.” In our case, the tax was calculated using the tax table and was multiplied by

7 the New Mexico percentage, 46.9809 percent. The non-New Mexico percentage, 53.0191 percent,

8 was not taxed, hence Taxpayer did receive credit for the non-New Mexico percentage of his income

9 in this manner. The Millers were right to claim this credit (valued at $5,314), and the Department

10 acted properly in granting it.

11 Causing some consternation among the parties was the fact that neither allocation nor

12 apportionment are defined in New Mexico Statutes. However, the concepts are fairly

13 straightforward. “Allocation is the process of sourcing income to one state.” Bender’s State

14 Taxation: Principles and Practice, § 3.09. “Apportionment” is the process of dividing interstate

15 income among participating states, so that the individual states can impose tax. Apportionment

16 formulas “do not trace the origin of items of income to a particular state.” Bender’s State Taxation:

17 Principles and Practice, § 3.10.

18 In sum, Taxpayers properly apportioned their income between the states of New Mexico and

19 Arkansas. Taxpayers received $5,314 of credit against their New Mexico tax liability by doing so.

20 Hence, their New Mexico liability was reduced from $10,023 to only $4,709.

21 Credit for tax paid to another state under Section 7-2-13.

In the Matter of the Dennis Miller, page 10 of 15.
1 In addition to the tax credit for income allocated to another state, Taxpayers claimed a credit

2 for taxes paid to another state. The statute NMSA 1978, Section 7-2-13 (2013) which grants the

3 credit reads:

4 When a resident individual is liable to another state for tax upon income derived
5 from sources outside this state but also included in net income under the Income Tax
6 Act as income allocated or apportioned to New Mexico pursuant to Section 7-2-11
7 NMSA 1978, the individual, upon filing with the secretary satisfactory evidence of
8 the payment of the tax to the other state, shall receive a credit against the tax due this
9 state in the amount of the tax paid the other state with respect to income that is
10 required to be either allocated or apportioned to New Mexico. However, in no case
11 shall the credit exceed the amount of the taxpayer’s New Mexico income tax
12 liability on that portion of income that is required to be either allocated or
13 apportioned to New Mexico on which the tax payable to the other state was
14 determined. The credit provided by this section does not apply to or include income
15 taxes paid to any municipality, county or other political subdivision of a state.
16 (emphasis added).
17 The phrase “income allocated or apportioned to New Mexico” has been emphasized because it

18 limits the credit to those items of income that are either from New Mexico sources, or from sources

19 outside of New Mexico that are required to be allocated and apportioned to New Mexico, as

20 determined by Section 7-2-11. There are some instances in which income earned out-of-state can

21 be allocated to New Mexico, but these exceptions do not apply here. See Regulation 3.3.11.11 (A)

22 NMAC (12/14/00) (“All compensation received while a resident of New Mexico shall be allocated

23 to this state whether or not such compensation is earned from employment in this state.”); see also

24 Regulation 3.3.11.13 (B) (NMAC) (12/14/00) (“Retirement income of a resident is allocable to New

25 Mexico, regardless of the source of the retirement income…”). Because Mr. Miller had already

26 allocated the LLC’s income in question to Arkansas, any income allocated to Arkansas is not

27 allocated to New Mexico, is not taxed by New Mexico (see above section concerning the credit

28 provided by Section 7-2-11) and any tax paid to Arkansas is hence not credited against New Mexico

29 taxes.

In the Matter of the Dennis Miller, page 11 of 15.
1 Use of TurboTax software.

2 Taxpayer used TurboTax software to complete his Federal, New Mexico and Arkansas

3 personal income tax returns. The software did not alert him to the double-dipping error caused by

4 both allocating income and requesting credit for taxes paid on the income allocated to Arkansas.

5 This reflects a deficiency in the software. This tribunal agrees with the United States Tax Court

6 which, in Morales v. Comm’r, T.C. Memo 2012-341, 2012 Tax Ct. Memo LEXIS 342, 104 T.C.M.

7 (CCH) 741, affirmed, 633 Fed. Appx. 884 (9th Cir. 2015) (non-precedential), held that the use of

8 tax preparation software is not a defense to negligence penalties. While the error was certainly

9 unintentional on the part of Taxpayers, the error does not amount to nonnegligence as defined by

10 Regulation 3.1.11.11 NMAC (1/15/01), hence a reduction in penalty under the Department’s

11 “proposed assessment” is not justified. See NMSA 1978, Section 7-1-69 (B) (2007).

12 Estimated tax payments

13 Taxpayer made estimated tax payments to New Mexico in 2018 and 2019. Three estimated

14 tax payments were equal, consisting of $1,100.00 each. Taxpayer submitted one reduced payment

15 of $461.00. However, Taxpayer did not update the entries on the TurboTax software, so the

16 software reported payments of $4,400 when in fact only $3,761 was paid. The Department’s

17 return adjustment was justified in this respect as well. However, the return adjustment notice

18 corrected the estimated tax paid to $3,830, which was unexplained, and essentially credited

19 Taxpayer with having paid $69 more. Since the amount of the reduction was not at issue, and

20 the record was not developed on the subject, the hearing officer will not sua sponte make a

21 determination as to what the correct amount was.

22 Conclusion.

In the Matter of the Dennis Miller, page 12 of 15.
1 The Department offers two credits for taxpayers who have income both taxable within the

2 state and without the state. The first is the credit for income allocated to a different state. The

3 second is for tax paid to another state. Because Taxpayers in this case claimed both credits on the

4 same income, the claim for one was denied. Causing confusion was the fact that Taxpayer self-

5 reported using the TurboTax program, and the program did not alert him to any error or deficiency.

6 When Taxpayer’s tax burden is reduced by application of the credit for income allocated to a

7 different state, taxes paid to that other state for the income allocated to that state are not entitled to

8 receive the benefit of the New Mexico credit for taxes paid to another state, otherwise the doubling

9 of credits would have the effect of a subsidy of a tax payment to another state. Taxpayer was not

10 entitled to a credit for the taxes paid to Arkansas.

11 CONCLUSIONS OF LAW

12 A. Taxpayer filed a timely, written protest of the Department’s Return Adjustment

13 Notice letter and jurisdiction lies over the parties and the subject matter of this protest.

14 B. The hearing was timely set and held within 90-days of the Department’s request for

15 hearing pursuant to NMSA 1978, Section 7-1B-8 (2019).

16 C. The Department’s Return Adjustment Notice is viewed under a lens of a

17 presumption of correctness, therefore it is Taxpayers burden to establish that they were entitled to

18 their claim for credit. See Regulation §3.1.8.10 NMAC (08/30/2001); see also Corr. Corp. of Am. of

19 Tenn. v. State, 2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779. See NMSA 1978, Section 7-1-17 (C)

20 (2007).

21 D. Taxpayer presented evidence that showed entitlement to the credit for income

22 allocated to Arkansas for income-generating activity pursuant to NMSA 1978, Section 7-2-11.

In the Matter of the Dennis Miller, page 13 of 15.
1 E. Taxpayer failed to meet his burden to show that he was entitled to receive an

2 additional credit for taxes paid to another state for income allocated or apportioned to New

3 Mexico under NMSA 1978 Section 7-2-13.

4 For the foregoing reasons, Taxpayer’s protest DENIED. IT IS ORDERED that the

5 Department’s denial of refund contained within the Return Adjustment Notice and proposed

6 assessment of tax, penalty and interest for 2018 was correct. Taxpayer has already paid the

7 proposed assessment, so nothing more is due.

8 DATED: April 13, 2020.

9

10
11 Ignacio V. Gallegos
12 Hearing Officer
13 Administrative Hearings Office
14 P.O. Box 6400
15 Santa Fe, NM 87502

16 NOTICE OF RIGHT TO APPEAL

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

18 decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

19 date shown above. If an appeal is not timely filed with the Court of Appeals within 30 days, this

20 Decision and Order will become final. Rule of Appellate Procedure 12-601 NMRA articulates

21 the requirements of perfecting an appeal of an administrative decision with the Court of Appeals.

22 Either party filing an appeal shall file a courtesy copy of the appeal with the Administrative

23 Hearings Office contemporaneous with the Court of Appeals filing so that the Administrative

24 Hearings Office may begin preparing the record proper. The parties will each be provided with a

In the Matter of the Dennis Miller, page 14 of 15.
1 copy of the record proper at the time of the filing of the record proper with the Court of Appeals,

2 which occurs within 14 days of the Administrative Hearings Office receipt of the docketing

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

4 CERTIFICATE OF SERVICE

5 On April 13, 2020, a copy of the foregoing Decision and Order was submitted to the parties

6 listed below in the following manner:

7 First Class Mail Interdepartmental Mail

8 INTENTIONALLY BLANK
9
10 John Griego
11 Legal Assistant
12 Administrative Hearings Office
13 P.O. Box 6400
14 Santa Fe, NM 87502

In the Matter of the Dennis Miller, page 15 of 15.