I paid extra tax after an audit but before the Department issued any formal assessment notice — does my refund clock start from the audit or from the original due date?

Plain-English summary

BTA Oil Producers was registered with the Department for New Mexico oil and gas production taxes. In 1990 the Department audited BTA for 1987–1989 and, in an August 1990 audit-findings letter, said BTA had underpaid by $34,657.92 in oil and gas taxes plus $12,682.23 in state royalty. The letter gave BTA three choices: dispute in writing, voluntarily file amended returns and pay, or do nothing and receive an official assessment. BTA chose to pay — it filed amended returns and remitted the full amount in October 1990 (an auditor had told it paying would stop interest from running). In December 1990 the Department issued a separate assessment for the penalty and interest, which BTA paid in January 1991.

In December 1993, BTA filed a refund claim (about $20,543 of the tax and $12,578 of the royalty). The Department granted the pieces tied to the November and December 1989 periods and all the penalty and interest, but denied the earlier periods. Its reasoning: the three-year refund window in Section 7-1-26(B)(1)(a) runs from the later of the original due date or the date an "assessment by the department" produced the overpayment — and because BTA paid before any formal "notice of assessment" was issued, there was (said the Department) no assessment by the Department, so only the original due dates counted, putting the older periods out of time.

Hearing Officer Gerald Richardson granted BTA's protest:

• The Department's own regulation defines the key phrase. For refund interest under Section 7-1-68, the Department's TA Regulation 68:1 (in effect since 1984) says whether an overpayment "arose due to an assessment by the department" depends on who initiated the liability-establishing action — the taxpayer or the Department — and it lists an audit as a Department-initiated action. The regulation does not require an actual "notice of assessment of taxes."
• The same phrase can't mean two things. Sections 7-1-26 (refund timeliness) and 7-1-68 (refund interest) both turn on an "assessment by the department," both apply to refunds of overpaid tax, and they "operate hand in hand." It "makes absolutely no sense" to read the phrase one way for the deadline and another way for the interest.
• Estoppel applies. Under Section 7-1-60, the Department is estopped where a taxpayer's position accords with a regulation in effect when the liability arose. TA Regulation 68:1 was in effect, and it treats an audit-driven overpayment as one arising from a Department assessment. The Department could not now interpret the same situation differently to shorten BTA's refund window. (Regulations are presumed a proper implementation of the tax laws, Section 7-1-5(G), and agency interpretations get substantial weight.)

Result: BTA's audit-driven overpayment counted as an "assessment by the department," its refund claim was timely, and the Department was ordered to grant the remaining refund with interest under Section 7-1-68.

What this means for you

Taxpayers who pay after an audit

If you pay a deficiency in response to a Department audit — even before the Department issues a formal "notice of assessment" — this decision treats that as an "assessment by the department." That matters because it can make your refund deadline later: the three-year clock in Section 7-1-26(B)(1)(a) runs from the audit-driven payment rather than only from each return's original due date, which can keep older periods within reach.

Oil and gas producers

Audit adjustments often sweep across several years of production periods at once. Under this decision, an overpayment flowing from that audit is measured for refund-timeliness from the audit result, not period-by-period original due dates — so a later refund claim can still capture the earlier audited periods.

Accountants and tax professionals

This is a rare estoppel-against-the-Department win, and it is anchored in Section 7-1-60's regulation-reliance ground rather than general equitable estoppel (which New Mexico applies against the State only reluctantly). The lever is TA Regulation 68:1: because the Department itself defined "assessment by the department" to include audit-initiated liabilities, it was bound to that reading when applying the refund statute of limitations. When the Department takes inconsistent positions on the same statutory phrase, look for a governing regulation that locks in one meaning.

Common questions

Q: I paid after an audit but never got a formal "notice of assessment." Did the Department "assess" me?
A: For refund purposes, yes, under this decision. The Department's own regulation treats an audit-initiated overpayment as one arising from an assessment by the Department, without requiring a formal notice — and it can't read the phrase differently for the refund deadline.

Q: Why does that help my refund claim?
A: The three-year refund limit in Section 7-1-26(B)(1)(a) runs from the later of the original due date or the date the Department's assessment produced the overpayment. Counting the audit-driven payment as an assessment pushes the start of the clock later, keeping older periods timely.

Q: Does this mean the State can always be estopped?
A: No. Estoppel against the Department is narrow. Here it worked because Section 7-1-60 estops the Department when a taxpayer's position matches a regulation in effect when the liability arose, and TA Regulation 68:1 supplied that regulation. Absent such a regulation or ruling, estoppel usually fails.

Citations and references

Statutes and regulation:

• § 7-1-26(B)(1)(a) NMSA 1978 — three-year window for refund claims, running from the later of the original due date or a Department assessment under § 7-1-17
• § 7-1-17 NMSA 1978 — assessment of taxes; the only provision defining an "assessment by the department"
• § 7-1-68(C) NMSA 1978 — interest on refunds; overpayments arising from a Department assessment draw interest from the date of overpayment
• § 7-1-60 NMSA 1978 — the Department is estopped where a taxpayer acted in accordance with a regulation in effect when the liability arose
• § 7-1-5(G) NMSA 1978 — a regulation of the secretary is presumed a proper implementation of the revenue laws (later recodified at § 9-11-6.2(G))
• TA Regulation 68:1 — an overpayment "arising from an assessment by the department" is one where the liability-establishing action (such as an audit) was initiated by the Department

Case cited:

• State ex rel. Battershell v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct. App. 1989) — substantial weight is given to an agency's interpretation of the statute it administers

Source

• Listing: New Mexico Decisions & Orders
• Decision post: BTA Oil Producers
• Decision PDF: D&O 96-05

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 BTA OIL PRODUCERS, TAXPAYER
NO. 620, PROTEST TO PARTIAL DENIAL
OF CLAIM FOR REFUND. NO. 96-05

DECISION AND ORDER

This matter came on for hearing before Gerald B. Richardson, Hearing Officer, on

December 13, 1995. BTA Oil Producers (hereinafter "Taxpayer") was represented by Don R.

Trott, CPA. The Taxation and Revenue Department (hereinafter "Department") was represented

by Margaret B. Alcock, Special Assistant Attorney General. Based upon the evidence and

arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. BTA is registered with the Department for payment of oil and gas production taxes

under Company No. 620.

2. In 1990, the Department conducted an audit of BTA's payment of oil and gas taxes

for tax periods January 1, 1987 through December 31, 1989.

3. As a result of the Department's audit, on August 3, 1990, the Department sent a

letter to BTA setting out the audit findings. The letter advised the Taxpayer of the Department's

preliminary underpayment determination, and the basis for that determination, including detailed

schedules showing the calculation of the underpayment. These schedules indicated that the

Taxpayer owed additional oil and gas taxes in the amount of $34,657.92 and state royalty

payments in the amount of $12,682.23.

4. The Department's audit findings transmittal letter gave the Taxpayer three options:

(1) to explain and document its disagreement with the audit findings in writing within thirty days
of receipt of the audit findings, (2) to voluntarily file amended oil and gas tax reports and remit

payment of the additional tax shown to be due, or (3) to take no action and receive an official

assessment from the Department.

5. During the exit interview conducted at the end of the audit, Janet Sobien, one of

the Department's auditors, told the Taxpayer that it could make a payment to stop the running of

additional interest if it wished. Except as contained in the department's audit findings transmittal

letter of August 3, 1990, there were no other statements or discussions regarding the timing or

method of paying the additional tax shown in the Department's audit findings.

6. In October, 1990, the Taxpayer filed amended oil and gas returns for the audit

period and remitted payment of additional tax in the amount of $34,657.92 and additional state

royalty in the amount of $12,682.23.

7. In December 1990, the department issued Assessment No. 72182 in the amount of

$11,544.20, representing penalty and interest due on the taxes shown on the Taxpayer's amended

returns calculated through the October, 1990 payment date when the Taxpayer remitted payment

of the underlying tax. The Taxpayer paid this assessment in January, 1991.

8. By letter dated December 28, 1993, the Taxpayer submitted to the Department a

claim for refund, requesting a refund of $20,543.19 of the $34,657.92 of tax paid as a result of the

Department's audit findings letter and $12,578.08 of the $12,682.23 state royalty paid as a result

of the Department's audit findings letter.

9. By letter dated April 26, 1994, the Department granted that portion of the refund

claim relating to tax periods November and December, 1989. The return for the November 1989

tax period was originally due on January 25, 1990; the return for the December 1989 tax period

was originally due on February 25, 1990. The Department granted the refunds for those periods

because the refund claim was made within the limitation period for filing such claims set out at

Section 7-1-26(B) NMSA 1978. Conversely, the Department denied the portion of the refund

2
claim relating to the earlier reporting periods because the returns for those periods were originally

due prior to January 1, 1990 and the Department believed that the refund claims for those periods

were beyond the statute of limitations set out at Section 7-1-26(B).

10. The Department letter of April 26, 1994 also granted the Taxpayer's claim for

refund of all interest and penalty relating to the Taxpayer's $20,543.19 refund claim. The

Department considered this portion of the Taxpayer's claim for refund to have been made within

the limitations period for filing such claims set out at Section 7-1-26(B) because the penalty and

interest had been paid in January of 1991 as a result of Assessment No. 72182.

11. On June 22, 1994, the Taxpayer filed a written protest to the Department's partial

denial of its claim for refund.

DISCUSSION
The sole issue to be determined is whether the Department correctly denied part of the

Taxpayer's claim for refund as being filed beyond the statute of limitations found at Section

7-1-26(B)(1)(a) NMSA 1978. The Department agrees that except for the statute of limitations

issue, the Taxpayer would be entitled to the refund it claims.

Section 7-1-26(B)(1)(a) provides in pertinent part as follows:
Except as otherwise provided in Subsection C and D of this section, no credit or refund of
any amount may be allowed or made to any person unless as a result of a claim
made by the person as provided in this section:

(1) within three years of the end of the calendar year in which:

(a) the payment was originally due, or the overpayment resulted from an assessment by the
department pursuant to Section 7-1-17 NMSA 1978, whichever is later;

In this case, the Department granted the portion of the refund claim, for the reporting

periods of November and December of 1989, since the returns for those periods were not due until

January and February of 1990 and thus the refund claims for those periods were made within three

3
years of the end of the calendar year in which the payment was originally due. The Department

also granted refund of the interest and penalty claimed because that had been paid as a result of

the assessment issued by the Department after the Taxpayer had paid the tax the Department had

indicated was owing in its audit findings transmittal letter to the Taxpayer. The Department

denied the remaining portion of the refund claim, however, because it believed that since an actual

assessment of tax was never generated after it issued its audit findings because the Taxpayer paid

the tax prior to an assessment being issued, that the refund claim did not qualify for consideration

as an overpayment of tax resulting from an assessment by the Department.

Section 7-1-26(B)(1)(a) specifically references Section 7-1-17 NMSA 1978 concerning

what is an assessment by the Department for purposes of determining the limitation period for

claiming a refund of taxes. Section 7-1-17 provides as follows:

A. If the secretary or the secretary's delegate determines that a taxpayer is liable for taxes
in excess of ten dollars ($10.00) that are due and that have not been previously
assessed to the taxpayer, the secretary or the secretary's delegate shall promptly
assess the amount thereof to the taxpayer.

B. Assessments of tax are effective:

(1) when a return of a taxpayer is received by the department showing a liability for
taxes;

(2) when a document denominated "notice of assessment of taxes," issued in the name of
the secretary, is mailed or delivered in person to the taxpayer against whom the
liability for tax is asserted, stating the nature and amount of the taxes assertedly
owed by the taxpayer to the state, demanding of the taxpayer the immediate
payment of the taxes and briefly informing the taxpayer of the remedies available
to the taxpayer; or

(3) when an effective jeopardy assessment is made as provided in the Tax administration
Act.

C. Any assessment of taxes or demand for payment made by the department is presumed
to be correct.

D. When taxes have been assessed to any taxpayer and remain unpaid, the secretary or

4
the secretary's delegate may demand payment at any time except as provided
otherwise by Section 7-1-19 NMSA 1978.

The Department specifically relies upon subsection (B) as outlining three types of tax

assessments. Subsection (B)(1) describes what the Department characterizes as a "self

assessment," when a taxpayer files a return showing a liability. Subsection (B)(2) describes an

assessment by the Department issued under normal circumstances. Subsection (B)(3) describes a

jeopardy assessment issued by the Department when collection of the tax may be jeopardized by

the delay involved in the normal assessment procedure. Although Subsection B, by its wording

specifically addresses when a tax assessment is effective, nonetheless, it does describe three types

of assessments. The distinction between whether an assessment was issued by the Department or

is a self assessment is also of some consequence, since under Subsection C the presumption of

correctness only applies to assessments made by the Department.

In this case, the Taxpayer only received the Department's audit findings transmittal letter

and never received any document entitled "notice of assessment of taxes" as described in Section

7-1-17(B)(2). The plain meaning of the language of Section 7-1-26(B)(1)(a) appears to support

the Department's interpretation that the overpayment of taxes for which the Taxpayer claims a

refund did not result from "an assessment of taxes by the Department pursuant to Section 7-1-17

NMSA 1978."

The Taxpayer asserts, however, that this interpretation is inconsistent with the

Department's own interpretation of what amounts to an "assessment by the department" in Section

7-1-68(C) NMSA 1978 as set forth in TA Regulation 68:1. Section 7-1-68 is the provision of the

Tax Administration Act which governs how interest on a claim for refund of an overpayment of

tax is to be calculated. Based upon TA Regulation 68:1, the Taxpayer argues that the Department

is estopped from applying a different interpretation to the same term for purposes of determining

the statute of limitations for claiming a refund of overpaid taxes than it applies when calculating

5
the interest to be paid on a claim for refund of a tax overpayment.

Section 7-1-68(C) NMSA 1978 (1993 Repl. Pamp.) provides as follows:

Unless otherwise provided by this section, interest on an overpayment not arising from an
assessment by the department shall be paid from the date the claim for refund was
made until a date preceding by not more than thirty days the date on which the
amount thereof is credited or refunded to any person; interest on an overpayment
arising from an assessment by the department shall be paid from the date
overpayment was made until a date preceding by not more than thirty days the date
on which the amount thereof is credited or refunded to any person. (emphasis
added).

Thus, under this provision, the interest calculation on overpayments of tax depends upon

whether the overpayment was a result of an assessment by the Department. If the overpayment

arose from an assessment by the Department, interest runs from the date the overpayment was

made. Otherwise, interest runs from the date the refund claim is made.

In December, 1984, the Department promulgated TA Regulation 68:1, interpreting Section

7-1-68 with respect to what amounted to an "assessment by the department" for purposes of

determining the date for commencing the calculation of interest on overpayments of tax. This

provision remains in effect to this day and provides as follows:
The determinative factor in deciding whether an "overpayment of taxes arose due to an
assessment by the department"--requiring interest on a refund to be computed from
the date of overpayment rather than the date of a claim for refund--is whether the
action establishing the amount of liability for taxes was initiated by the taxpayer
or by the department. Actions initiated by the taxpayer include, but are not
limited to, the filing of a tax return reporting a tax liability for which no payment
or partial payment is submitted, or for which payment is submitted by a check
which is subsequently dishonored by the bank or the late filing of any tax return.
Actions initiated by the department include, but are not limited to, an audit of the
taxpayers books and records or the issuance of a provisional assessment as a result
of a taxpayer's failure to file any return or returns. (emphasis added).

Under the provisions of TA Regulation 68:1, an overpayment of taxes is deemed to arise

due to "an assessment by the department" where the action establishing the amount of liability

6
for taxes was initiated by an audit of the taxpayer's books and records. The regulation does not

require the actual issuance of a "notice of assessment of taxes."

Any regulation issued by the secretary of the Department is presumed to be a proper

implementation of the provisions of the revenue laws administered under the provisions of the

Tax Administration Act. Section 7-1-5(G) NMSA 1978 (1993 Repl. Pamp.) 1 Additionally,

substantial weight is to be accorded to the interpretation given a statute by the agency charged

with administering the statute. State ex rel Battershell v. City of Albuquerque, 108 N.M. 658,

777 P.2d 386 (Ct App. 1989).

The Department has not challenged the validity or propriety of TA Regulation 68:1.

Rather, the Department argues that this regulation is irrelevant because it applies to the interest

calculation on overpayments of tax, not the statute of limitations for claiming refund of tax

overpayments. Additionally, the Department attempts to distinguish the regulation based upon

the fact that Section 7-1-68 contains no reference to Section 7-1-17, which Section

7-1-26(B)(1)(a) does.

With respect to the Department's claim of irrelevance, this argument would have us

overlook the fact that there is no material difference in the term being interpreted and applied and

that this term is being applied in the same context. Both Sections 7-1-26 and 7-1-68 deal with

overpayments of tax either "arising from an assessment by the Department" (Section 7-1-68) or

which "resulted from an assessment by the department" (Section 7-1-26). Also, Sections 7-1-26

and 7-1-68 operate hand in hand. Section 7-1-26 determines whether a claim for refund of

overpaid taxes is properly made and Section 7-1-68 determines how interest on such a claim made

under Section 7-1-26 is to be calculated. Both sections apply to claims for refund of overpaid

taxes and both refer to an "assessment by the department." It makes absolutely no sense to

interpret essentially the same language in the same context of a claim for refund of overpaid tax in
1
This provision was repealed by laws 1995, Ch. 32 § 7, and was recodified in substantially the same form at Section
9-11-6.2 (G) NMSA 1978 (1995 Supp.).

7
an inconsistent manner.

With respect to the Department's argument that Section 7-1-68 should be distinguished

because it does not specifically reference Section 7-1-17 concerning assessments of tax, a review

of the history of Section 7-1-68 reveals that since its enactment in Laws 1965, Ch. 248, §69 until

it was substantially rewritten by Laws 1989, Ch. 325, §11, the provision did specifically reference

Section 7-1-17 or its predecessor provision in the 1953 statutes, Section 72-13-32 NMSA 1953.

Thus, at the time the Department promulgated TA Regulation 68:1, Section 7-1-68 specifically

referenced Section 7-1-17 in conjunction with an "assessment arising from an assessment by the

division 2 ", and the regulation has been unchanged except for changing the reference from

"division" to "department". Besides, Section 7-1-17 is the only provision of the Tax

Administration Act which applies to describe what an assessment by the Department is. Clearly,

the Department was aware of the provisions of Section 7-1-17 when it promulgated TA

Regulation 68:1 and it cannot now distance itself from the interpretation it applied to determine

what amounts to an "assessment by the department."

Section 7-1-60 NMSA 1978 (1993 Repl. Pamp.) provides for certain circumstances when

estoppel will be applied against the Department with respect to its enforcement of the tax laws.

Specifically, it provides:
In any proceeding pursuant to the provisions of the Tax Administration Act, the
department shall be estopped from obtaining or withholding the relief requested if
it is shown by the party adverse to the department that the party's action or
inaction complained of was in accordance with any regulation effective during the
time the asserted liability for tax arose or in accordance with any ruling addressed
to the party personally and in writing by the secretary, unless the ruling had been
rendered invalid or had been superseded by regulation or by another ruling
similarly addressed at the time the asserted liability for tax arose. (emphasis
added).

In this case, TA Regulation 68:1 was in effect at the time the Taxpayer's liability arose for

2
The reference to "division" was changed to "department" by Laws 1989, Ch. 325, §11.

8
which it made the overpayment of tax which it now asks to be refunded. As noted above, it

makes no sense to interpret the phrase "assessment by the department" differently, depending

upon whether the statute of limitations is being applied or only the interest to be paid on the same

overpayment of tax for which refund is sought. The Department has interpreted that an

overpayment of tax arising from an assessment by the Department to mean an overpayment of tax

resulting from an audit by the Department in TA Regulation 68:1. It is estopped from

interpreting the same situation differently when applying the provisions of Section 7-1-26(B)(1)(a)

to determine the timeliness of the claim for refund for an overpayment of tax.

CONCLUSIONS OF LAW

1. The Taxpayer submitted a timely, written protest to the Department's partial denial

of its claim for refund and jurisdiction lies over both the parties and the subject matter of this

protest.

2. The Department has interpreted an overpayment of tax arising from an assessment by

the Department to mean an overpayment of tax resulting from an audit by the Department in TA

Regulation 68:1.

3. The Department is estopped from denying that the Taxpayer's payment of taxes as

a result of the audit by the Department was not an overpayment resulting from an assessment by

the Department for purposes of calculating the statute of limitations to be applied to the
Taxpayer's claim for refund pursuant to Section 7-1-26(B)(1)(a) NMSA 1978.

4. The Taxpayer's claim for refund was therefore made within the limitation period of
   Section 7-1-26(B)(1)(a) NMSA 1978.

For the foregoing reasons, the Taxpayer's protest is granted.

The Department is hereby ordered to grant the remaining portion of the claim for refund

filed by the Taxpayer together with interest pursuant to Section 7-1-68 NMSA 1978.

9
Done, this 31st day of January, 1996.

10